QE3 is starting to show signs of going the same way as QE1 and QE2. Treasuries have reacted badly to the FOMC’s announcement last Thursday. Of course, equities have responded well and overall, the longer term call we made for US equities to rise significantly this year remains in place. Rather optimistically, it was suggested that “the S&P could surpass the October 2007 high (1,565.1) by the year end” (daily commentary, February 6th 2012). The euro crisis, a slowdown in US consumer demand and weaker exports in response to China’s cooling, have all put a break on US corporate earnings. But the recovery in house prices has been stronger than expected. Mortgage refinance has been well supported by low rates and HARP 2.0. The number of homeowners suffering from negative equity fell sharply in Q2, according to CoreLogic. This will increase the pool of borrowers able to refinance. The vicious cycle of falling house prices and rising negative equity that drove the downturn has been broken and is going into reverse. However, for it to be sustained, borrowing costs have to remain low. QE1 and QE2 ultimately failed because the FOMC did not anchor long term rate expectations. QE3 could eventually fail for similar reasons.
Our new book, The Credit Crunch, Housing Bubbles, Globalisation and the Worldwide Economic Crisis argues that the current financial turmoil signals a crisis in globalisation that will challenge the free market economic model.
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