Some family obligations in Hamburg, Germany, along with a few unexpected visitors, will be filling up my Sunday; so there will be no post today. The regular update of this blog will resume early on Monday.

MarketWatch featured a story with the intriguing title “Monetizing all the debt, all the time:”

The oracles at Goldman Sachs Group say that $750 billion of quantitative easing is priced in to the market, and possibly $1 trillion — a frightful prospect that was hardly diminished by last week’s lost jobs report.

On top of that, there’s $300 billion to $400 billion in annual GSE run-off that needs replenishment under QE1.5. So Brian Sack, the monetary apothecary who operates the New York Fed’s drive-thru window, is going to be giving Wall Street a lot of POMO. Call it $100 billion per month of Permanent Open Market Operations, and be done.

Not coincidentally, it appears that there’s also baked into the cake about $100 billion per month of new Treasury paper. According to CBO’s August update, the two-year, cumulative red ink under current law (FY 2011-2012) will total $1.7 trillion. But that doesn’t count the upcoming lame duck session’s predictable one-more-stimulus bacchanalia.

Juiced up by their election rout, the tax-side Keynesians in the GOP are certain to ram through a two-year extension of the Bush tax cuts for one and all.

In return, the hapless White House will insist this one-half trillion dollar gift to the “still haves” be matched with several hundred billion more in presently unscheduled funding for emergency unemployment benefits and other safety net programs for the “no-longer-haves.”

In combination, these measures — along with more realistic economic assumptions — mean that the FY2011-2012 deficit will be $700 billion higher than current projections, pushing the two-year total to at least $2.5 trillion. Read Minyanville’s “What a Republican Victory Means for Equity Markets.”

These considerations make one thing virtually certain: After the new Congress sinks into rancorous partisan stalemate and does absolutely nothing about this fiscal hemorrhage, the Treasury will be selling at least the $100 billion per month of new government paper for so long as the New York Federal Reserve is open to buy. Stated differently, national policy now amounts to monetizing 100% of the federal deficit.

In the olden times — say three years ago — the idea of 100% debt monetization would have been roundly denounced as banana republic finance. No more.
…
But what emergency motivates today’s greenback experiment?

It would appear to be two self-evidently foolish objectives. The first is the claim by the Fed’s money printer’s caucus that QE2 in the magnitude being contemplated might lower the 10-year benchmark rate by 50 basis points. Stunning. We have a nation drowning in 19 million empty housing units owing to the Fed-engineered housing bubble, households still buried in $13 trillion of debt from the same cause, and idle business capacity on a scale not seen since the 1930s — and we’re supposed to believe that taking down the current all-time low interest rate by another 50 basis points will make a difference?
…
Worse still, one salutary effect of this dubious proposition, according to chief apothecary Brian Sack, is that risk asset values are likely to be elevated to levels “higher than they would otherwise” reach — thereby encouraging consumers to go back to their former spending ways owing to the illusion of higher net worth, as conjured by the Fed.

These are pretty pathetic reasons for issuing massive quantities of digital greenbacks. Like all other experiments in printing-press finance, its main impact will be to give a destructively erroneous signal to fiscal policymakers on both ends of Pennsylvania Avenue: Namely, that chronic trillion-dollar deficits don’t matter because the Fed is financing them for free.

[Emphasis added]

There is much more to this story; be sure to read the entire link if this subject interests you. QE-2 has been priced in the market and has been the main cause of this current rally. Should any disappointment about the size or the impact of the upcoming stimulus emerge, the bears will likely have a field day.

However, let’s be positive and assume that QE-2 is everything the market wanted it to be. Very likely will we see some further upside moves, however, I would be very cautious about its duration.

Why?

In my view, QE-2 is doomed to failure just like the original version did (along with all other stimulus packages) not produce much of a real economic impact.

Eventually, the actual economy will have to stand up, identify itself and, unless it has made serious and verifiable progress on its own, the bears will go after the bulls, and the market will collapse like a beaten piñata.

I am just as curious as you are as to how long the current QE-2 euphoria will last. Markets usually go down a lot faster than they go up, so be prepared once the inevitable turnaround arrives.

On a personal note, I have, for the time being, enabled the anonymous comment section again, so feel free to share your views. Offensive comments and spam will be filtered out.

My latest No Load Fund/ETF Tracker has been posted at:

http://www.successful-investment.com/newsletter-archive.php

No matter what the news, the major indexes only seem to know how to move higher.

Our Trend Tracking Index (TTI) for domestic funds/ETFs moved above its trend line (red) by +6.62% (last week +6.88%) and remains in bullish mode.

The international index has broken above its long-term trend line by +7.56% (last week +6.77%). A new Buy signal was triggered effective 9/7/10. If you decided to participate, be sure to use my recommended sell stop discipline.

For more details, and the latest market commentary, as well as the updated No Load Fund/ETF Tracker StatSheet, please see the above link.

The futures were right, as I mentioned in yesterday’s early morning post, and the markets picked up the momentum from Europe and galloped higher, although they closed well off their highs for the day, as the chart above shows (courtesy of MarketWatch.com).

One of the reasons for the pullback was increased uncertainty caused by problems with home foreclosure proceedings. It appears that finally Attorneys General from all 50 states have joined to examine foreclosure practices.

At issue is not whether a non-paying homeowner should be foreclosed on but whether all state laws were properly followed. Adding more confusion is the fact that most mortgages were sold several times and the questions has come up as to who would now be the legal party with the right to foreclose. At least that is my understanding at this time.

The effect was that the major indexes pulled back as lenders, such as Chase with 115,000 mortgages, will now have to increase reserves for litigation costs, which will not only reduce profits but also could extend over an unknown time frame.

Nevertheless, the indexes ended to the upside with the S&P; 500 now honing in on its 2010 high, which occurred back in April. The big performer, however, was gold with a new intraday high of 1,376.

Again, the happy trio (gold, stocks and bonds) continues its upward path with gold being the asset class that makes the most sense in this environment. The destruction of the dollar, along with global economic uncertainty, were some of the forces pushing the metal to its current levels.

I would not buy gold outright here, because it can be subject to violent corrections, but we own it indirectly via a mutual fund that has broad exposure to it.

Amazingly enough, the stock market is able to locate only good news, or turn bad news in a positive. As a result, the focus remains on recovery hopes, whether they are substantiated or not.

I may be one of the few who always seems to get concerned when markets rally with utter abandon, as it’s just a matter of time when the inevitable downside comes into play.

As anticipated, the Fed’s minutes yesterday showed that the members of the FMOC are concerned about continued high unemployment and whether deflation will swamp the economy.

It was not apparent as to when the Fed would act by injecting more cash into the economy via the purchase of Treasury securities. No specifics as to the amount of money intended to be used were mentioned.

This entire act of Quantitative Easing (QE-2) represents an untried and unproven method based on nothing but theoretical economic models to get the economy moving forward by avoiding a return into recessionary territory at all costs. It’s questionable in my mind whether it will have any positive effect at all, and it remains to be seen what the backlash will be.

Obviously, the stock and bond markets have been enamored by the fact that help is on the way; and in the end they may very well be the only beneficiaries of this effort. In fact, as I am writing this in Germany, it’s 2:20 am PST, and the European markets have reacted favorably to the Fed’s minutes and are up over 1%. The futures indicate a stronger opening in the U.S. markets as well.

While QE-2 may have a short-term positive effect on your portfolio, I question whether it can solve any of the pressing concerns along the lines of high unemployment, a depressed real estate market or any of the other issues that ail us.

This may very well be the last bulled the Fed has in its economic gun; if it fails to get the intended results, there is bound to be a reaction in the stock market, and it won’t be a pleasant one.

Therefore, I maintain my view that it is better to participate in this rally in a conservative way, than to go all out and suffer the consequences when the inevitable directional turn takes place.

Made it over the big water hazard and arrived safely in Hamburg, Germany last night.

With the bond market being closed on Monday, equities meandered aimlessly and closed at or within a few points of the unchanged line.

There simply was no driver in sight to provide momentum in either direction; it almost looked like the calm before the storm. The storm could very well come in form of today’s release of the minutes of the last FOMC meeting, which will contain discussions on some of the Fed’s options.

Bearish news was released by the National Association for Business Economics as this group lowered its economic growth forecast for 2011 to 2.6% from 3.2%, which is still very optimistic in my view. Furthermore, they see unemployment remaining above 9% all of next year with a weak Holiday spending season ahead.

I wonder if Wall Street, with its unrelenting focus on the recovery, even considers the possibility that an economic slowdown has merit and is very likely to show up over the next few months.