QEIII Perspective.

Next Stock Crash Coming
Friday, August 26th
By Evaldo Albuquerque, Editor, Exotic FX Alert
Dear Sovereign Investor,
The U.S. has many traditions.
We dress up in costumes on Halloween. Buy flowers on Mothers Day. Host barbeques on Memorial Day. Set the sky on fire on 4th of July.
In the past few years, there’s something else that has become another U.S. tradition: printing money. Just like Christmas, investors now expect it every year.
In 2009 Bernanke announced the first round of quantitative easing, a.k.a. QE - the new fancy name for printing money. Then last year, he announced the second round of quantitative easing during the Fed’s annual gathering in Jackson Hole.
The 2011 version of the Jackson Hole meeting is scheduled for Friday. Plenty of analysts are saying Bernanke won’t let the tradition die.
They expect Bernanke will announce QEIII at the end of this week at this meeting...


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But as I will show you, it’s very possible the world will have to wait longer for QEIII. That’s important because it will have tremendous impact on all markets in the short-term.
Stocks could even crash this August 26th! Let me explain....
The Latest Market Shock
Recent economic data has been just ugly. It’s very likely we’re heading to another recession. In fact, we may be in one already.
The most recent shock came in the Philly Fed Economic Index. This index measures manufacturing activity in the area covering eastern Pennsylvania, southern New Jersey and Delaware. A negative number indicates contraction.
This index isn’t just negative. It plunged from 3.2 in July to -30.7 in August.
As you can see in the chart below, the Philly Index (in red) tends to move with the ISM national manufacturing index (in blue).
The Philly index suggests the ISM index will drop below 50, which shows contraction in manufacturing activity. We will get the official data on September first.
Manufacturing Activity Suggests a Recession is Coming




With the U.S. economy in this anemic state, many market participants are expecting Bernanke to pull another magic trick out of his hat. The market is thirsty for another round of quantitative easing.
Goldman Sachs, for example, said recently that it’s operating under the assumption the Fed will announce QEIII this week. But I wouldn’t make that assumption.
Sorry Goldman, But No QE III for Now
Since last year, when the Fed announced QEII, a lot has changed. It’s much harder for the Fed to justify another round of quantitative easing now than it was last year.
Last year, inflation was falling, increasing the risk deflation would take over. Back then, Core CPI, which is the Fed’s favorite measure of inflation, went from 1.7% in January to 0.9% in June.
This year, inflation has been going up. Core inflation has risen from 1.0% in January to 1.8% in July. The Fed’s informal target range for longer-term core inflation is 1.7 to 2%.
So the Fed can no longer argue inflation is too low.




I don’t know how Bernanke can justify another round of QE on August 26th, during the Fed’s Jackson Hole meeting.
We all know that QEII was a massive failure. It lifted asset prices, such as stocks and commodities, but didn’t do anything for the economy. In fact, higher prices of oil and food made consumers’ lives a lot harder, and forced them to cut back.
Besides that, Bernanke is facing increasing political pressure. Some have started to question the Fed’s independence, suggesting it’s propping up the stock market for political reasons.
Even Fed members have started to oppose Bernanke’s views. Many have said they will vote against another round of money-printing.
For that reason, as much as Bernanke loves printing money, I don’t see Bernanke announcing another round of QE this week.
Mark This Date on Your Calendar
This Friday will be a key day for financial assets. We will not only have the famous Jackson Hole meeting, but we will also get the revised GDP growth for the second quarter.
The market expects a revision from 1.3% to 1.1%. But I wouldn’t be surprised to see a much bigger revision. If the number is much lower than expected, fears of another recession will definitely escalate.
That will increase even more expectations of another round of QEIII. If Bernanke disappoints the market, watch out below. Commodities and stocks will plunge.
In the forex market I will be playing that by shorting emerging market currencies, which tend to suffer when fears of a recession increase.
If you want to copy this strategy, look to buy the dollar and short exotic currencies like the Hungarian forint, Mexican peso or South African rand.
So mark that date on your calendar. Friday will set the stage for the next major move - and even a possible crash - in the markets.
Best Regards,