Europe, China put off hard decisions while riding coattails of QE3

Morally Hazardous

In the aftermath of all the market euphoria after QE3, it seems that already governments are using the stimulus as an excuse to not face the tough questions that really face them. While it was not likely ahead of the Presidential election in the United States that congress would have all of a sudden found fiscal religion, it seems China and Europe are using QE3 as an excuse to not make the hard choices that deep down everyone knows that eventually we will have to make.

While China whines about QE3, it may be just what the doctor ordered for China’s struggling economy. After having to raise fuel prices again last week, inflation demons are making it more difficult China to stimulate the economy. The Fed with its QE3 should send a flood of cash into the Chinese economy so the Chinese can now decide to sit on their hands.

In Europe where the markets have been celebrating the pledge by ECB chief Mario Draghi to do whatever it takes to save the euro, it is now finding it more difficult to get Germany on board. It seems Germany thinks that the pressure is off as well as governments like Italy and Spain that now will find it easier to make excuses to delay reforms as QE3 has scared the wolf away from their door.

Still despite those worries, the shock value and extreme bullishness of increasing its policy accommodation by purchasing additional agency mortgage-backed securities at a pace of $40 billion per month, the increase of holdings of longer-term securities by about $85 billion each month through the end of the year is not enough to take away our longer term commodity market expectations.

Oil also has to be prepared for more tensions that are red-hot across the globe. Fox News reported that Israeli Prime Minister Benjamin Netanyahu made a direct appeal to American voters on Sunday to elect a president willing to draw a "red line" with Iran, comparing Tehran's nuclear program to Oklahoma City bomber Timothy McVeigh and reminding Americans of the devastating repercussions of failed intelligence.

His remarks were an impassioned election-season plea from a world leader who insists he doesn't want to insert himself into U.S. politics and hasn't endorsed either candidate. But visibly frustrated by U.S. policy under Obama, the hawkish Israeli leader took advantage of the week's focus on unrest across the Muslim world and America's time-honored tradition of the Sunday television talk show to appeal to Americans headed to the polls in less than two months.

Tehran claims its nuclear program is peaceful. Netanyahu said the U.S. would be foolish to believe that, using football metaphors and citing examples of past terrorist attacks on U.S. soil to appeal to his American audience. "It's like Timothy McVeigh walking into a shop in Oklahoma City and saying, 'I'd like to tend my garden. I'd like to buy some fertilizer. Come on. We know that they're working on a weapon,'" Netanyahu said.

The past week, Netanyahu called on Obama and other world leaders to state clearly at what point Iran would face a military attack. But Obama and his top aides, who repeatedly say all options remain on the table, have pointed to shared U.S.-Israeli intelligence that suggests Iran hasn't decided yet whether to build a bomb despite pursuing the technology, and that there would be time for action beyond toughened sanctions already in place.

Netanyahu disagrees, estimating that Iran is about six months away from having most of the enriched uranium it needs and warning that letting them reach the "goal line" would have disastrous consequences.

Obama's Republican opponent, Mitt Romney, has said he is willing to take a tougher stance than Obama against Iran, although his campaign has declined to provide specifics. He also has aligned himself personally with Netanyahu, casting the Israeli leader as a longtime friend.

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