The money spigots are on

As central banks around the world open the money spigots, prepare fomoney-spigot.jpgr a major reflation (or inflation) of asset prices. The impact is poised to hit commodities of all kinds – oil, fuel, metals and chemicals.

Last week, the Bank of Japan announced it will pump $60bn into its economy by buying government bonds, corporate debt and other securities. The central bank is aiming to boost the economy and halt the rise of the yen, which is hitting exports.

This is the “quantitative easing” (QE) move governments around the world are talking about. It essentially pumps cash into the system as central banks buy securities.

World bourses jumped on the announcement. Japan’s Nikkei average rose 1.5% on Tuesday, October 5 and another 1.8% on Wednesday to reach a two-month high. On Tuesday, the UK’s FTSE index rose 1.4%, while in the US, the Dow Jones Industrial Average jumped over 200 points, or 1.8%, to 10,945.

In the US, industrial materials stocks outpaced the broader market. There were strong gains in the chemical sector with Dow Chemical up 3.6%, DuPont 3.0%, Eastman Chemical 2.8%, Celanese 4.3% and Methanex 3.6% and Westlake Chemical 4.0%.

This was no accident. It is the industrial materials companies that stand to gain the most from asset inflation and a potential revival of the staggering economic recovery. These companies have tremendous operating leverage to higher demand. And with that much more money floating around, there is little doubt pricing power will increase.

Wall Street analysts are also ratcheting up profit estimates for chemical companies for the third quarter and beyond on stronger-than-expected performance.

In the August 16 issue, we called for the US Federal Reserve to crank up the printing press to give a boost to the anemic economic recovery. It looks like that could be imminent. Observers are anticipating a program that could entail the purchase of $1 trillion in government and other debt securities.

The Bank of England is also now pointing to QE after suspending purchases in February. It actually has a nifty 10-page pamphlet downloadable on its website called “Quantitative easing explained: putting more money into our economy to boost spending” – complete with a flow chart.

The European Central Bank has spent €63.5bn (86.9bn) to buy up government bonds.

QE is the last resort, or “nuclear option” when all the other levers to trigger economic expansion have been pulled.

And that’s what many global economies face. The US, UK and Japan have all cut key interest rates towards zero. While this has offered economic relief and likely has spared further pain through the recession, it has not led to a solid recovery complete with job growth. Unemployment, especially in the US, remains stubbornly high. Last week’s jobs report showed the US private sector shed another 39,000 positions.

The expectation that central banks around the world will turn on the money spigots is reflected in the surging prices of gold and crude oil. These commodities will continue to gain value as the global monetary base is devalued through QE.

It is no coincidence that gold has once again hit an all-time high of almost $1,350/ounce.


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