This blog post originally appeared on RealMoney Silver on Oct. 27 at 7:59 a.m. EDT.As Halloween, the midterm elections and quantitative wheezing approach over the next week, some strange and spooky developments have occurred:
- Interest rates rise. Interest rates are rising despite the intended opposite effect of QE 2 to be announced next Wednesday. (The yield on the 10-year U.S. note, at 2.68%, has risen by about 30 basis points recently and has retraced the entire yield decline since Bernanke's introduction of the concept of QE 2 at the Jackson Hole meeting in August.)
- As does inflation rise. While the Fed is focused on deflation, inflationary pressures are mounting. (I call this screwflation.) While this is one of the primary stated objectives of QE 2, the unintended consequence of rising input costs and rising prices of food, copper (up 16%), gasoline (up 13%) and so on is to reduce global growth, pressure corporate margins and squeeze consumers' real incomes further. (And, as Sir Larry Kudlow teaches us, the price of gold (up 8%) is the precursor to worrisome inflationary trends.)
- A rapid U.S. dollar drop. Sliding 10% against the euro will surely help exports, but further quick declines could cause tensions with our trading partners.
- Chaos in housing. Mortgage-gate has trumped the impact of unprecedented lower mortgage rates on the slope of the housing recovery. (Rep and warranty issues have served to create market disequilibrium and have put a dagger into the heart of housing and the availability of mortgage credit.)
- The long tail of the last credit cycle remains an ever present risk. Europe's debt woes continue. As an example, spreads on Greek bonds have risen by nearly 50 basis points overnight.
- Quantitative easing lite. A positive outcome from QE 2, viewed as the sine qua non by bullish investors, is starting to look increasingly smaller than the Tepper camp desires or expects. Again, more shucks and aww, not the shock and awe of the first round of quantitative easing.