Bank of England Provides a Window Into Federal Reserve QE3

 |  Includes: AGG, DIA, GLD, QQQ, SLV, SPY
by: Avery Goodman

The U.K. has not been a dominant factor in the world's economy at least since the end of World War II. However, London is still the second of two leading banking and finance centers of the world, the first being New York. The actions of the Bank of England, obviously, are not as important to anyone outside the U.K., as the actions of the Federal Reserve and the ECB, but they are important nonetheless. The most useful aspect of Bank of England deliberations is that their minutes tend to be considerably more complete, frank and to the point than the various minutes and other communications produced by the Federal Reserve and, almost always, the two central banks are on the same page.

When the BofE is considering a rate hike, you can be fairly certain that the Fed is doing the same and just not saying so. Similarly, when British central bankers express an interest in more counterfeiting operations to print money (a/k/a "quantitative easing"), you can be fairly certain that the Fed has a similar interest but is just not saying so. This was amply illustrated, back in early 2009, when the Bank of England announced its intention to begin a $300 billion program of printing money several weeks before the Fed, only to be outdone by the Federal Reserve, which announced QE-1 in mid-March and told the world it intended to print about $1.75 trillion. The latest minutes of the Bank of England meeting on June 7-8, 2011 probably reflects the same thought processes that are going on at the Federal Reserve. In the pertinent part, the BofE's minutes read as follows:

Moreover, the fiscal challenges in the euro-area periphery highlighted the potential for further adverse shocks to demand. For some of these members, it was possible that further asset purchases might become warranted if the downside risks to medium-term inflation materialised …

For one member, the balance of risks to inflation continued to warrant an immediate expansion of the Committee's programme of asset purchases, financed by the issuance of central bank reserves. For that member, it was likely that inflation would fall below the target in the medium term. The stability of measures of inflation expectations and pay growth during a prolonged period in which inflation had been above the target suggested that it was increasingly unlikely that they would begin to drift upwards. For this member, the weak pattern of demand both in the United Kingdom and overseas had evolved broadly as expected.

So there you have it. The BofE minutes show that there is a substantial block of policy-makers who support more money-printing by the central bank. The minutes also note, later on, that a few members also want to raise rates and roll back the QE bloated balance sheet. This is the same position that several regional Fed bank Presidents have taken on the FOMC Committee.

So, does this information from England help investors make informed investment decisions? You bet it does! Because the ideas that are flowing through the minds of the BofE policymakers nearly always mirror those of the Federal Reserve and because they are almost always stated more openly and clearly, we can assume a lot from these minutes.

It is almost a certainty that stock prices are going to take a big downturn in July continuing throughout the summer. This will be the result of the cessation of QE-2 in America and the sea of liquidity that has been bolstering them and, to some lesser extent, the continuing insolvency problems in Europe. Money printing advocates on both sides of the Atlantic will get a license to print more money. We can estimate that this will happen, in all probability, no later than at the September meetings.

Because of the impending stock market crash, bond yields probably won't rise as much as a lot of people are now predicting, at least not right away. In the wake of crashing equities markets it is almost certain that we will seerenewed cross-Atlantic printing orgies. That is when we are going to see QE-3 in both America and a similar event in the U.K.

Investors should be prepared. Precious metals are now seeing declines as they react to margin calls and stop-loss order triggering that is coming from falling stock and oil prices. This is a temporary phenomenon and investors should take advantage of it while it lasts, especially when, like now, the price decline is being assisted by short sellers' trading bots. Precious metals, therefore, should be bought on the dips, but it is impossible to know the exact bottom of a manipulation event. Programmed trading bots can be designed to punch through any technical support level when they are fueled by unlimited loans from the Federal Reserve, at zero percent interest rates. Accordingly, you should place your orders at prices you feel comfortable with, hoping to get filled, rather than trying to catch the bottom of the dip. If you try to catch the bottom, you may lose all possibility of taking a position and be stuck with increasingly debased fiat currency, instead.

Anyone still holding equities and bonds would probably be wise to sell them before the beginning of July. Although a collapsing stock market will somewhat support bond prices against falling and prevent a dramatic rise in bond yields, it is unlikely to be enough to make bonds rise substantially, in light monetary debasement over the past three years and America's increasingly poor fiscal situation. Only renewed bond buying by the central bank will be sufficient to push up bond prices for any significant amount of time or lower bond yields. By September, the whole world may be so sick and tired of Fed, BofE and ECB's fiat currency emissions, that bond yields may not benefit much from renewed quantitative easing, unless central banks are willing to buy all of them. But, if they did that, currencies would collapse.

With each iteration of quantitative easing, there is less benefit to stock and bond prices, in real terms. The law of diminishing returns is already very much in operation. The question of whether or not it will be wise to hop back into stocks, before the new iteration of QE is a good one. However, there is no easy answer. It will mostly depend on how far stock prices fall during this summer. If they decline enough, it may be worth buying some equities. Keep in mind that anything which is stimulative enough to cause stock prices to regain any semblance of their 2007 nominal values would cause precious metals prices to rise a lot more.

Disclosure: I have no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.