By MoneyMorning.com.au
Good news for millions of AFL supporters:
After six months of tediously long, footy-free weekends, the 2012 footy season has finally arrived.
This tells us something else as well: the first quarter of the year is nearly gone.
In amongst all those school holidays, public holidays, and long weekends, the market actually put in a solid three months of trading.
In yesterday’s Money Morning, we wrote to you about the ground the market has covered so far in this first quarter. And what a quarter it has been!
Markets rallied. Even though the ASX lagged the rest of the world with a modest 6% gain, the stocks I tipped to Diggers and Drillers readers have gained 19.2% so far this year.
This good start to the year has been in no small part thanks to the central banks’ love of the printing press as the ultimate solution.
This quarter, an extra trillion euros hit the European banking sector thanks to Mario Draghi, the new president of the European Central Bank (ECB). This quenched the raging flames of fear in the market, and risk taking came back into the market, manifesting as the ‘Draghi Rally’.
But money printing doesn’t solve anything. Ask Zimbabwe. It was starting to look like the sugar rush from this lazy trill’ would start fading in the coming months.
Firstly, as the market cheered the fall in the bond rates of Italian, French and Spanish bond yields, Portugal’s bond yields – stubbornly stuck above a terrifying 12% – stood out like a canine’s proverbials. This fly in the ointment could have quickly spoiled the fun.
Now the all-important Italian bond yields have started to creep up as well to reach above 5% again. Italy is one of the core three Euro countries of Germany, France and Italy. If the cancer regrows in Italy then the fun times in the market will stop pretty quickly.
But what a difference a day makes. Now we have liquidity flooding in from other quarters to keep these yields under control for another quarter or two.
Yesterday I thought today’s Money Morning would be bearish.
But now it looks like it’ll be a case of ‘another quarter and another trillion bucks’. The head of the Fed, Ben Bernanke, spoke last night. If I knew he was going to do that, I would have bought gold yesterday.
After hinting for months that the Fed would use QE3, it pretended to go cold on the idea a few months ago. Was Bernanke bluffing? Probably. Because when the whole market is already salivating at the prospect of money flooding in, the money has much less effect. But after leaving it out of his speeches recently, he now seems to be readying us for it. Last night he said:
‘Further significant improvements in the unemployment rate will likely require a more-rapid expansion of production and demand from consumers and businesses, a process that can be supported by continued accommodative policies‘
We don’t know what exactly this means yet. Keeping rates low for years, buying bonds, or another dose of ‘Operation Twist’ – please sir, can I have some more?
You would do well to ask Bill Gross, the head of PIMCO, a $252 billion bond fund. He started his career as a professional blackjack player, making a living off the casinos in Vegas.
These days he makes a fairly comfortable living off the biggest casino in the land – the Fed.
He now has half his chips riding on QE3.
By this I mean he is betting $131 billion on the chance of QE3. Specifically, he has bought that amount of Mortgage Backed Securities, as he thinks the Fed will execute QE3 by buying these securities.
And I’d trust the instinct of an ex-blackjack professional over most market commentators any day.
Besides – It makes sense.
Because, like the legend he is, Bernanke has painted himself into a corner. After talking up QE3 late last year, more QE is now priced into the bond markets, and to a degree, the stock markets. If he didn’t now follow through, the markets would fall, and the economy would stumble. He has to follow through on QE now to avoid going backwards.
This is the kind of schoolboy error you get when you put someone with no market experience in the top job. Recall the ‘Brown Bottom’? This was when Gordon Brown, the Chancellor of the Exchequer in Britain, signalled to the gold market that the Bank of England wanted to sell hundreds of tonnes of gold. So the gold market licked its lips and managed to suck the price down by 10% to get the bargain of the century.
Brown then sold nearly 400 tonnes of gold at the absolute bottom of the gold market, raising the sterling equivalent of $3.5 billion. That gold would have been worth over $20 billion today. And what did the boy genius buy with it?
Euros!
Dr. Alex Cowie
Editor, Diggers & Drillers
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