A growing chorus of critics are sounding the alarm about QE2; in fact they think it has the potential to be the downfall of the US.
We know that's dramatic but that's effectively what widely followed strategist Dick Bove of Rochdale told us on the Halftime Report.
Sound The Alarm
He believes the economic damage generated by QE2 could doom America to a fate similar to the Weimar Republic, which you'll remember disintegrated into Hitler’s chancellorship largely due runaway inflation and a government perceived as grossly inept.
Hopefully, the US isn't looking at something quite that extreme, but Bove did use that analogy to illustrate his point, which is QE2 makes more problems than it solves.
“A country (that) has a huge debt and then debases its currency and prints money" -- which is what we're doing now and what happened in Germany in the 1920's - "is creating a problem that’s structural and long-term in nature.”
"The time has come for the Fed to realize this is going to hurt the economy not help," says Bove.
Because some of these comments are rather extreme, it's important to note that ultimately Bove does not necessarily disagree with the Fed's actions - rather he takes issue with the speed and magnitude of it all.
"Historians can tell you rapid increase in money supply does not improve the economy," Bove says. However it does increase inflation. "The Fed may be creating a liquidity trap," he adds.
Bove is so troubled by the speed of QE2 he’s one of 23 market mavens who have signed an open letter to Ben Bernanke published by the WSJ – urging him to re-think the strategy.
Open Letter To Bernanke
They say “the Federal Reserve’s large-scale asset purchase plan (so-called “quantitative easing”) should be reconsidered and discontinued. We do not believe such a plan is necessary or advisable under current circumstances. The planned asset purchases risk currency debasement and inflation, and we do not think they will achieve the Fed’s objective of promoting employment.”
Usually the Fed doesn’t flinch in the face of criticism, but the people who signed this letter are so influential it led to the following response:
“As the Chairman has said, the Federal Reserve has Congressionally-mandated objectives to help promote both increased employment and price stability. In light of persistently weak job creation and declining inflation, the Federal Open Market Committee’s recent actions reflect those mandates.
How should you position?
”In the near-term, say the next 6-9 months, you’d want to be in the financial sector,” Bove counsels. The raw material of the financial sector is money and if the Fed is going to create more money and put it into the financial system then there’s going to be more profits.
But long-term he sees trouble.
“Long term it will debase the value of the assets and in so doing earnings will soar but P/E multiples will collapse.”
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PLAYING MATERIALS IN WAKE OF CAT DEAL
Investors pushed the materials names higher on Monday making big bets on the sector after Caterpillar gobbled up Bucyrus for $7.6 billion – the biggest deal in CAT’s history.
The equipment maker’s headline grabbing move is widely considered a bullish bet on global growth with Caterpillar CEO Doug Oberhelman telling CNBC, "The mining segment for us is a key strategic area. Demand for minerals, for coal, for lots of things that come out of the ground will be increasing,” in the year’s ahead.
The Street largely took these developments to mean Caterpillar is eager to boost its exposure to fast-growing emerging economies. Bucyrus generates about a third of its revenue in the developing world.
What should you be watching now?
I’d keep an eye on BHP, says Brian Kelly. They just abandoned their bid for Potash and they have a load of cash on the books. Walter Energy and Massey are both rumored takeover targets. Also I think the CAT deal is positive for Cliffs as well.
I like the action in Caterpillar, says Oppenheimer’s Carter Worth. I’d buy right here.
I’m keeping an eye on JoyGlobal, reveals Pete Najarian. The stock is now trading at a 52-week high on the wake of the CAT deal.
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S&P MOVES
Meanwhile the desk was also keeping an eye on the action in the S&P broadly, wondering if strength in materials was enough to buoy the market broadly.
What’s the trade?
I’m watching 1194 on the S&P, says Steve Grasso. If the market continues to hold I suspect investors will continue to buy – especially the sectors in which there’s strong M&A action.
Technically, the action in the S&P looks healthy, adds Oppenheimer's Carter Worth. We’re testing the April highs and now backfilling.
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Trader disclosure: On November 15, 2010, the day this video was recorded, following stocks and commodities mentioned or intended to be mentioned on CNBC’s "Fast Money" were owned by the "Fast Money" traders; Pete Najarian owns (CNI), (MEE), (WLT), (MS), (NTRS), (F) and (MRO); Steve Grasso owns (ASTM), (BA), (BAC), (BWC), (C), (CSCO), (JPM), (LPX), (MOT), (NDAQ), (PFE) and (PRST).
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