Focus on QE Overlooks Other Factors

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"If printing money doesn't work, what will be what do we do next?"

Commodity and equity markets have been rallying on ideas that the Fed will pump more liquidity into the system with quantitative easing, perhaps as soon as the next Federal Open Market Committee meeting in early November.

But some market watchers wonder if issues like the uncertainty with U.S. home foreclosures might not turn the view of investors back to other problems after any Fed move. Last week, when it was discovered that several banks had signed off on thousands of foreclosures without reading the documents, shares of bank stocks fell.

Shawn Hackett of Hackett Financial Advisers said there's a very good chance that the market will start to focus on something else. "The basis for QE2 is that the economy is in shambles. The first QE didn't do the trick, which is why this one is taking place. If we had a booming economy we wouldn't need it," he said.

"A decline of shares will see investors liquidating carry positions, pushing volatility up and the (dollar) higher," they said.

And a higher dollar would cause gold to swoon.

If the Fed signals at the next FOMC meeting it will ease, gold should take another real leg higher into year end, with a move to $1,500 an ounce, said Spencer Patton of Steel Vine Investments. "The market will always be thirsty for more Fed action."

Further down the road, Hackett said the problem will come if the second round of easing doesn't boost the economy. "If printing money doesn't work, the question is what will be what do we do now? There is no Plan B," he said. "That’s when the markets will lose all faith in the Fed. They’ll have a failed policy."

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