Is QE3 Right Around The Corner?

So much for no QE3, at least if Charles Evans gets his way. Chicago Federal Reserve President Charles Evans was on CNBC just a few minutes ago, and comments from Evans made it sure seem like an additional round of quantitative easing is on its way. Gold, silver, and bonds are moving higher on the back of Evans' comments, most notably, when he said that he was "nervous." Gold has shot up $20 in just a few minutes to well over $1,800 an ounce, while silver is comfortably over $40 an ounce. Copper is also moving higher this morning. Evans said that he is nervous of about the state of the economic recovery, as it looks like we have not really recovered from the financial crisis of 2008. He said we are "not technically in a recession," but it certainly does feel like one. With unemployment continuing to hover over 9%, and GDP growth of around 1%, the U.S. economy certainly feels like we are in a recession. Some have even gone so far to say that we never ended the first recession. Evans said that it is tough to characterize the job market as anything but recession-like. Initial claims every week are around 400,000, and continuing claims continue to be well above 3.5 million. In July, the economy only added 117,000 jobs. Granted, that was better than expected, but still well off the pace of around 250,000 jobs the country needs to create just to keep up with population growth. What really got everyone going this morning were the comments Evans made on QE2, and the potential for QE3. He said that he still favors "strong accommodation", as the recent economic data has been soft. Recent manufacturing indexes from Philadelphia, Richmond, and other parts of the country have been sharply negative. The majority of the time when this happens, a recession is not too far off. Evans also made another precarious comment that perked up everyone's ears. Evans said the U.S. would have been much worse without "QE2." When the Federal Reserve enacted the $600 billion program in November, it boosted equities, it lowered yields, but it did not help bring down the unemployment rate in the country. The Fed has a dual mandate, both to foster maximum employment, and to keep inflation in check. QE2 brought higher commodity prices, and did not cut down on unemployment, so there are many opponents for another round of quantitative easing. Evans said that QE2 is still affecting the Fed's balance sheet, and that the Fed needs to explain conditions which affect future conditions. He also said that the Fed should clarify policy intentions going forward. To me, this sounds like the dovish Evans is beginning to lay out the case for a third round of quantitative easing. When Federal Reserve Chairman Ben Bernanke spoke on Friday at Jackson Hole, he made no mention of QE3, but he did say that the Fed is expanding its September meeting to two days, as opposed to one. If there is another round of quantitative easing hinted at in September or announced, this could be the biggest fight the Fed has ever had. The hawks have basically come out and said no more, and the doves are fighting back. Sit back and enjoy the show. This one is about to get very interesting. ACTION ITEMS:

Bullish:
Traders who believe that QE3 is coming might want to consider the following trades:

• Gold, silver, and other hard commodities should do well. Consider SPDR Gold Trust ETF GLD, iShares Silver TrustETF SLV as investments if QE3 is hinted at.

• We could also see sharp food inflation, which would be good for PowerShares DB Agriculture Fund DBA, Market Vectors Agribusiness ETF MOO and individual names like CF CF and Potash POT.

• Tech should also do well, thanks to the weaker U.S. dollar. Consider Apple AAPL, Microsoft MSFT and VMware VMW.

Bearish:
Traders who believe that Evans and the doves will not get their way may consider alternate positions:

• If QE3 does not come, stocks will be left to their own accord. Since Evans thinks we are close to a recession, earnings multiples could contract sharply. Short any higher earnings multiple names, like Baidu BIDU or Dangdang DANG.
  
  

Neither Benzinga nor its staff recommend that you buy, sell, or hold any security. We do not offer investment advice, personalized or otherwise. Benzinga recommends that you conduct your own due diligence and consult a certified financial professional for personalized advice about your financial situation.