QE2 will end June 30. The economy is barely growing despite low interest rates, stimulus spending, and quantitative easing. The side effect of the Fed’s policies has been the excess money going into commodities. The price of silver has skyrocketed. Other commodities have also rallied because of the speculation in which investors expect continued weakness in the dollar and future inflation. The end of QE2 may result in a pull back in commodity prices.
Real estate is still slumping and will continue. Automobiles cost about the same as they did some years ago, we’re paying about the very same for airline travel that we did 10 years ago, and computers are becoming more affordable. (Keith Springer) For many items not tied directly to commodities, the list goes on. Nonetheless, it does not really feel like that because food and energy are much higher. The Fed eliminates food and energy from the inflation index, but the problem is, we all eat and drive.
There seems to be no problems associated with the supply of oil and the Saudis have claimed to reduce production. This implies that much of the rising prices has been due to speculation. According to Yahoo! Daily Ticker, only about 1% of oil futures trades involve actual delivery. The rest is form speculators attempting to profit from price volatility. Prices may continue to rise in the very short term, however, there will be downward pressure in the intermediate term.
There may eventually be a QE3. However, it will likely come later because of rising inflation. If we were to go into a new recession or renewed slump in the economy, QE3 may be the only tool the Fed has because interest rates are already at zero. A worsening economy always results in a government feeling the need to do something. With our budget problems and the limitations of the Fed, there are fewer options.
QE2 did not lower interest rates which was the Fed’s intent. Instead, it pushed up asset prices in equities, commodities, and emerging markets.
Bill Gross, the world’s most prolific bond investor, believes that government spending is out of control. He has sold his positions in treasuries and is now short treasuries. That being said, the smart money betting against treasuries should be a warning.