QE1, QE2, and now, QE3? No, those aren’t British monarchs. Rather, they’re the numbers and letters that have become synonymous with the Federal Reserves practice of printing money and flooding the market with cash through the use of the bond market. By buying up bonds, the Fed has to “print money” to cover the sale. And when more money hits the market, so too does inflation.
The Fed has already gone through two rounds of quantitative easing, and now one analyst says we should get ready for a third round.
Simon Maughn, co-head of European equities at MF Global, told CNBC Wednesday that he sees the move on the horizon, and once again the U.S. will be a big buyer.
“The bond market is going in one direction which is up-falling yields which is telling you quite clearly the direction of economic travel is downwards. Downgrades. QE3 (a third round of quantitative easing) is coming,” he said. “The bond markets are all smarter than us, and that’s exactly what the bond markets are telling me.”
He added: “One more big injection of cash into the bond market should take you through at least the summer season into the beginning of the fourth quarter.”
“That cash injection will have the normal inflationary knock-on impact, driving back up commodities, supporting industrial stocks, dragging the financials up with them… I think it’s all about the monetary injection trade.”
The move is significant especially when you factor in rising food prices. According to the LA Times, wheat prices are “70% higher than a year ago,” while “prices for corn have more than doubled in the last 12 months.”