Good Bye QE 2. The commodity bulls will miss you.
The Fed meets today and if they do as expected, the policy known as QE 2, will come to an end as it wraps up its $600 billion Treasury buy-back program. If the Fed makes it clear that the money printing is coming to an end then we may see short commodity sellers once again have confidence to make a stand in the market place.
If you were a commodity bear it was very tough because let's face it, you were playing against a stacked deck. The Fed with its unlimited power to print more money and its willingness to do so, created an environment where commodity bears had to think twice before taking a short position. Stepping in front of a Fed driven commodity bull train made it more risky to be short despite the fundamentals of the moment. The Fed had the power to change the fundamentals by not only devaluing the currency, but by changing the fundamentals. By artificially stimulating the economy it would increase demand for commodities not only in the US but in the hot and expanding emerging markets. Not only had those governments like the Chinese moved to diversify its holdings in dollars, they looked to commodities as a dollar alternative. The Fed, fearing deflation, tried to create inflation by creating money out of thin air and they changed the entire commodity trend and drove away the deflation demons of that particular moment. The commodity bears knew that the Fed could at anytime run the printing press and change the fate of a commodity.
After QE 1 oil had just gotten out of the $30.00 per barrel handle into the $40s, the Fed shocked the floundering economic system that was in a deflationary funk. QE 2 was strike two against deflation and the Chinese. Ben Bernanke shortly thereafter defending QE 2 blamed the Chinese for forcing his hand. He said the Chinese, not the Fed, was creating global economic problems by preventing their currency from strengthening while their economy booms. The Fed felt it had no choice (but to print more money,QE2) as the U.S. government moved slow to attack a rising budget deficit and at the same time face an imbalance as the Chinese continue to manipulate their currency. As I wrote before, the Fed felt compelled to move as the Chinese siphoned off jobs and wealth from other parts of the globe at a rate that was unfettered by moderation by a rising currency that helped create imbalances. The huge influx of capital and by default artificially cheap goods, helped create and add to deflationary pressures in the U.S as well as other parts of the globe. That's not to say of course that cheap goods are not good because they are and they provide good growth for the economy, yet at the same time cheap goods on the back of a major budding economic superpower currency manipulation does not allow for an orderly fall in price, which exports deflation.