Star Wars fans (not just those who like the movies, but the really disturbed ones with action figures still in their packaging) know today as ‘Revenge of the Fifth’, a knock off of the final movie installment ‘Revenge of the Sith’, and following the ‘May the 4th be with you’ Star Wars holiday on May 4th…
But Revenge of the Fifth may have new meaning for all of those long essentially anything today, with sharp sell offs occurring across the board after a surprise rate hike in Malaysia and big miss (2nd largest discrepancy between estimated and reported ever) on unemployment claims in the US.
We’re left to ask if this is what the end of QE2 without the prospect of a QE3 looks like… We were not big believers in the theory that everything was going to sell off at the end of QE2, as it was too telegraphed, too widely reported, and made too much sense. If it was that easy and it was that destined to happen, why then were things continuing to go up? Wouldn’t people start to sell before the end?
Anyway, the Fed’s QE2 quiver is close to empty, and it could be that this is just what they had in mind. Deflate the mini bubble they had created in commodities, which in a roundabout way will help strengthen the economy (lower input costs). Can they inflate the economy out of recession, and then deflate commodity prices to keep it running at the right level? Only time will tell, but a market correction in commodities without the Fed having to raise rates has to be a welcome sign to ‘the Bernanke’ and friends, if the market can do their dirty work for them – they can keep real interest rates negative a bit longer and work their way out of the huge debt burden.