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June 06, 2011 at 09:21 PM
On the surface Ben Bernanke is trying to promote a new and transparent Federal Reserve. His first ever post-FOMC meeting news conference answered some questions about the future of quantitative easing (QE), however, many dangerous misconceptions remained on the table.
1) Inflation
Bernanke continues to deflect any responsibility that QE has resulted in inflation caused by energy and commodity prices. Ironically, Bernanke does concede that more QE will result in more inflation.
Obviously, there’s a broken track in this train of thought, particularly since inflating stock prices is the intent of QE2. If QE lifts one investable asset, stocks, why wouldn’t it lift another?
2) The Dollar
The first two months after QE2 launched in early November the U.S. dollar was rising. Since then, it’s been falling.
I’ll leave it up to others to debate whether QE2 sunk the greenback or not but I will gladly point out the flawed reasoning behind Mr. Bernanke’s claim that the Fed is stabilizing the U.S. dollar by limiting inflation. Excuse me, but trying to contain the inflation you caused does not qualify as a step towards strengthening the U.S. currency.
3) Treasuries
It's logical to assume that demand for U.S. Treasuries will dry up when QE2 comes to an end. However, QE2 was supposed to lift Treasury prices and reduce interest rates.
The opposite happened. Since QE2 was introduced, the iShares Barclays 20+ Year Treasury ETF (TLT) dropped from 101 to as low as 88. 30-year Treasuries topped and rolled over on August 25, 2010.
On that very day, the ETF Profit Strategy Newsletter warned : “Technical analysis along with fundamentals suggest that T-Bonds are getting ready to roll over. A look at the overall picture suggests that this is more than just a minor correction.” From nearly 110 on August 25, TLT dropped as low as 88.
