Monday, 6 June 2011

With economy weakening, is QE3 coming?

Despite the weak economic data in recent weeks, John Hussman is not too pessimistic about the US economy. From his latest commentary:

In recent weeks, and particularly in last week's ISM, employment claims and unemployment reports, we've observed a substantial weakening in measures of economic growth. At present, the evidence of economic deterioration is not severe - as I noted in 2000, 2007 and last summer, recession evidence is best obtained from a syndrome of conditions, including the behavior of the yield curve, credit spreads, stock prices, production, and employment growth. While all of these components have weakened, they have not deteriorated to the extent that has (always) accompanied the onset of recessions.

To a large extent, the current softening of economic conditions is really nothing more than the recrudescence of the deterioration we saw last summer. Basically, we've arrived upon the can that the Fed kicked down the road when it initiated QE2...

Which leads to the question: Will the Fed embark on QE3? Hussman says:

[I]t seems unlikely that we will observe a push toward QE3 unless we observe substantially more economic weakness than we've observed to date. Moreover, much of the strength of the market's response to QE2 appears to have been conditioned by the fact that stocks were down substantially from their prior highs when Bernanke began discussing the policy. The upshot is that we view the likelihood of QE3 as fairly remote, but we can't rule it out. Even so, the prospects of QE3 and further Fed-induced speculation are probably not worth contemplating until we first observe significant economic and market weakness.

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