QE3, The Dollar and Monopoly Money

It was another big week in the markets with QE3 being announced by Big Ben on Thursday resulting in a huge rally in risk assets. One of the funnier quotes I saw about QE3 was that apparently Bernanke played a lot of Monopoly as a kid, here is section 1.1 of the FAQ:

QE3 Monopoly Money

The timing of QE3 has a lot to do with the upcoming election and while it will boost stocks in the short term, I am really concerned about the long term consequences. It’s important to think about the impact QE1 and QE2 had on the markets in order to see what impact QE3 might have. David Rosenberg of Gluskin Sheff had this to say:

It’s not as if QE2 accomplished anything except a blip on the screen as far as the market was concerned, and it elicited no lasting impact for the economy either. QE1 did work but that was when the system needed to be saved – the S&P 500 rallied 74% on that program. QE2 was nothing more than a gimmick shrouded in deflation concerns that never materialized, and during this program the stock market ended up just 16%. And so what will QE3 bring except more in the way of diminishing returns and resource misallocations caused by central bankers attempting to play around with mother nature by manipulating asset prices? Call it the equivalent of the Godfather Trilogy: Godfather I was epic; Godfather II not quite as good but still fine; and Godfather III was a dud.

QE3 Diminishing Returns

Also keep an eye on the US dollar this week. You can see below that UUP has sold off sharply and broken below key support. There was a mini reversal on Friday, but it would want to retake the $21.75 level pretty quickly in order to be called a false breakout. UUP is quite a long way from the 50 and 200 EMA’s and is oversold on stochastics and RSI.

UUP Daily Chart

 

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