Are markets selling off in anticipation of more QE?

Sell-off could be part of the great correction, as QE2 comes to an end.

Mary Altaffer/AP
Traders work the crude oil options pit at the New York Mercantile Exchange May 6, 2011 in New York. Oil prices rose after the US government said the economy added 244,000 jobs in April, then slid to under $100 a barrel.

We’re finally getting some action on Wall Street! The Dow has lost more than 200 points in the last two days. Gold is down more than $50. And oil closed below $100 yesterday.

Could this be the sell-off we’ve been waiting for? Maybe.

Why do we expect a sell-off? Because we’re still in a Great Correction. And in a correction, prices tend to go down. Deflation is the underlying trend…not inflation. Debt gets marked down…defaulted on…and written off.

By our reckoning, the beginning of the correction actually began more than 10 years ago when the NASDAQ cracked wide open in January 2000. Since then, the US economy and stock markets have gone nowhere, in real terms.

Who noticed? The feds poured on so much liquidity – beginning in ’02…with a huge flood in ’08-’09 – everything was swamped. Trash floated.

But households drowned…they were shackled to sinking incomes, while the cost of living rose with the tide.

And their costs are still rising. On the radio last night we heard about how hard $4 gasoline has hit America’s lower and middle classes. These people live on tight budgets. If their fuel costs go up $20 a week…they feel it.

The Wall Street Journal:

LONDON – Consumer prices in developed economies rose in March at the fastest pace since October 2008, driven by energy and food inflation.

A couple of reports in The Financial Times have focused on how they cope. One tells us that they aren’t driving to malls the way they used to.

“Online shopping jumps in US as cost of fuel curbs trips to malls,” says the headline.

No report from the malls yet…but online sales are said to rising at a 7% rate.

Meanwhile, “Americans ditch TV is move to save money,” says another headline.

“Lower and middle classes are giving up their televisions and unplugging their landline telephones…” it begins.

Hey, there’s some good news. The TV has probably done far more damage than drugs and alcohol. And certainly a lot more damage than terrorism. Yet, the feds spent $2 trillion fighting terrorism (according to anotherFT report). How much did they spend fighting TV?

But let’s think more about what happens to investors.

If we’re in a Great Correction…

…and if liquidity from the feds is the only thing that keeps the correction from dragging prices down…

…then, you’d expect prices to go down whenever the feds ease up, right?

Well, get ready. When the feds stop pouring on liquidity, the correction reasserts itself. That’s what happened last summer. QE1 ran dry. Stocks fell throughout the summer…leading Ben Bernanke to announce QE2 in August.

What’s happening now? Is the market anticipating another QE end? Are prices headed down until another QE is announced?

We’ll find out…

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