Who remembers the 1990 movie, The Hunt for Red October? We won’t go into a full recap of the movie here but the part we wanted to talk about was the ending. Right as the captain of the Russian submarine, the Red October, goes to surrender his sub to the Americans, a second Russian sub launches a torpedo at the Red October. Captain Ramius, the Russian sub commander, knew that if he quickly turned his sub into the oncoming path of the torpedo, then the torpedo wouldn’t have time to arm itself and it would break apart harmlessly on impact. He did this and then knew that Capt. Tupolov, the commander of the other Russian sub, would try again and this time would take his safety measures off so that the torpedo would arm immediately. Capt. Tupolov launched his second torpedo but his plan backfired when an American sub caused the torpedo to go astray. The torpedo circled back, and now fully armed, headed straight for Tupolov’s sub. Just before impact, Tupolov’s lieutenant turned to him and said “You idiot, you have blown us up”.
So why are we talking about a 20-year-old submarine movie? Because the ending is very similar to Ben Bernanke’s monetary policy. He launched QE1 and just like the first torpedo fired at Red October, it failed to have an impact. Most investors anticipated that he would be launching QE2 soon afterwards, just like Capt Ramius knew Tupolov would be firing a second torpedo. Most investors knew QE2 was very dangerous, just like Tupolov knew that firing the torpedo without safety measures would be dangerous. But Tupolov thought he couldn’t miss the Red October, just like Ben Bernanke thought that QE2 couldn’t help but fix the economy. And just like Tupolov’s torpedo turned on him and blew up his own submarine, it is becoming very apparent that Ben Bernanke is about to blow up our monetary system.
How can we say that QE2 is a failure when it has only been about a week since it was announced? Well, let’s point to a few quick facts:
1) Major world financial leaders, including those from Germany, China and Brazil, have condemned the Fed’s move.
2) China’s bond rating agency has downgraded US debt.
3) Conservative Republicans are not happy with QE2. Sen. Shelby had this to say: “While I share Bernanke’s concern regarding the economy, I am worried about the risks associated with his actions.”
4) The Fed’s own people have condemned QE2. Fed Governor Kevin Warsh said in a WSJ op-ed on Monday, “Given what ails the economy, additional monetary policy measures are poor substitutes for more powerful pro-growth policies.” In other words, don’t shoot a second torpedo especially if it has its safety measures off.
5) The bond market is losing respect for the Fed and is doubting that it can control the long end of the yield curve. Since last week QE2 announcement, the 30-year Treasury yield has increased 32bps to 4.25%.
Just like Capt. Tupolov’s lieutenant said to him, we are afraid that we have to say to Mr. Bernanke, “You idiot, you have blown us up.”