Financial Apocalypse by Bert Dohmen Dohmen Capital


By Bert Dohmen
Friday, June 24th, 2011

By Bert Dohmen, editor of the Bert Dohmen’s WELLINGTON LETTER

The $600 billion dollar QE2 program of the Federal Reserve is ending in late June. What will the consequences be for the markets? Let’s look at history.

Last year when the first QE program stopped, it was followed by the stock market plunge in May and June, along with commodity prices (except for the precious metals).  T-bonds soared as a flight to safety.

The flash crash of May 6 last year was the beginning. Will we have another flash crash? Not likely. However, when the Fed takes the foot off of the accelerator, liquidity is withdrawn. And that’s bearish.

Look at what happened in early 1937 when the economy was recovering and the stock market had had a big upmove for several years. The Fed felt they could stop stimulating. When they did, the DJI plunged 50%.

Yes, when you are on drugs, it hurts to stop, so the experts say. That also applies to stocks.

A member of the FOMC, Richard Fisher, chairman of the Federal Reserve Bank of Dallas said this about current Fed policy. He is making sure he will not get the blame for the bad consequences of QE2 and potential QE3. He said in a speech:

“I do not, however, feel that further monetary accommodation will speed the process. It might well retard job creation, should it give rise to inflationary expectations, or worse, imply that, having, suffered the slings and arrows of popular and political contempt as we went about doing what we did to save the financial system, we have now been compromised and become a pliant accomplice to Congress’ and the executive branch’s fiscal malfeasance. I am wary of those risks.

Indeed, as a voting member of the FOMC this year, I have made clear within the meeting room and in public speeches that, barring some frightful development, I will vote against any program that might

seek to extend or enlarge the substantial monetary accommodation we already have provided, just as I argued against the $600 billion extension the voters on the Committee approved last November….”

Fisher is an astute individual. He is worth listening to, especially because he doesn’t have the urge to “go along to get along.”

Economist David Rosenberg wrote about the QE experience in 2001 in Japan. He noted that:  the Bank of Japan launched the program on March 19, 2001, the Nikkei surged 7.5%, from 12,190 to 13,103. It went on to make a fresh high on May 7, at 14,529 (just under two months after the announcement) — rallying another 11%. Three-quarters of the post-QE rally to the May highs occurred in the first four days.

However, three months later, it became clear that the economy was not responding. Six months after the start of QE, just before 9/11, the Nikkei was at 10,500, down 27% from the post QE announcement high, and 14% lower than on the day of the announcement.

The Japanese experience may be a good guidepost, although, the U.S. is not Japan, and the Fed is not the Bank of Japan. However, the above supports what von Hayek wrote in his classic economic book, THE ROAD TO SERFDOM decades ago, namely that after a credit bubble bursts, the government throwing artificially produced money into the markets doesn’t work and just makes things worse over the long term. In other words, you can’t solve “over-indebtedness by creating more debt.”

Financial Apocalypse
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