Eric King:  “I’m putting you on the spot here, Art, and it’s interesting to hear you talk about this QE situation, but the Fed has been terrible at forecasting QE up to now.  And the Fed minutes reminded me of their statement in 2012 that there would be ‘No more QE.’  That turned out to be wrong because by the end of the year we were having additional QE.

I believe in a way that the Fed minutes release was the same message today, essentially, from 2012, but just repackaged.  I wanted to get your thoughts on the Fed giving this appearance they will back off on QE.  I know there’s remorse, but there is also a theory out there that we are in a ‘QE to infinity’ situation.”

Cashin:  “Well, I think what happens is, and with no disrespect to the Fed, but if you go back and look over the last 10 years, the Fed and its staff have been absolutely dreadful at predicting the economy.  And they always seem to be a bit too optimistic.

They are thinking of GDP as growing at 3%, 3.5%, and many economists are saying, ‘No, no, no. You are going to be lucky to get a 2.5% growth, and maybe 2%.’  So, I think what they were trying to do with the QE statement was set up (a hypothetical scenario), if things are going to improve, we do at least want you to have an early warning that we’ll be viewing these things.

But I think the markets look back on their track record and say, ‘You know you guys couldn’t find this stuff with both hands and a hall of mirrors.  So we’re a little doubtful about your concern that the economy is picking up because you’ve been wrong in the past.’  Just as you said, when they came to a somewhat similar statement or conclusion in 2012.” 

Asked about the possibility of a US downgrade by ratings agencies, Cashin responded, “It is a dangerous area, particularly from the rating agencies’ standpoint as you said, if they wait to go to the debt ceiling to fight it out.

What they might do is look at things like the end of the sequester deadline, when forced cuts are about to be made, and use the leverage that comes up there.  But I’m afraid as we saw last year, including a debt rating reduction, we could go there again.

I would warn our elected officials that in other countries, at other times, rating cuts tend to have a kind of cumulative effect.  You can get by the first time.  There is a kind of forgiveness built-in.  You get to the second one and they say, ‘These people are reprobates.’  So we’re playing a most dangerous game.”

Eric King:  “With the Fed increasing QE, and all of this money printing around the world, Art, what type of effects will we see in 2013?”

Cashin:  “Well, there are a couple of things to look at.  For example, we are beginning to see rates move up.  Some of that was based on the FOMC minutes.  The thing that I will watch for is mortgage applications.  If the public begins to believe that the trend in rates has turned, that rates are heading higher, I believe you may begin to see a stampede of people trying to lock up those low mortgage rates. 

That will be a signal to me that the public is coming to believe that the great bond bull market is probably ending.  It will mean money coming out of bond funds.  So one of the key things I will be monitoring very carefully over the next month or two:  Is there new or explosive growth in mortgage applications?

Another critical thing to watch will be what happens in Japan.  Do they in fact adopt a new aggressive means to drive down the yen by increasing their debt?  What Mr. Abe wants is for the Bank of Japan to out-Fed the Fed by being far more aggressive in quantitative easing.

Now, they already have an enormous national debt, and it is at stunning levels relative to their GDP.  That will be a critical thing to watch over the first six to nine months, to see what happens if Japan tries to take this aggressive posture.  And if in doing so it becomes disruptive to their debt, which then in turn, because they do hold a not insignificant amount of American debt, could become very disruptive to US credit markets.”  

This is an incredibly powerful and timely interview with Art Cashin because it is the first time he gives his outlook for 2013 in terms of what investors around the world should expect to see in the coming year with regards to the economy, central planners, global stock markets and more.  The above information was just a small portion of his incredible interview.  The King World News audio interview with Art Cashin is available now and you can listen to it by CLICKING HERE.

© 2013 by King World News®. All Rights Reserved. This material may not be published, broadcast, rewritten, or redistributed.  However, linking directly to the blog page is permitted and encouraged.

The interviews with Eric Sprott, Art Cashin, Stephen Leeb, John Embry and John Mauldin are available now.  Also, be sure to listen to the other recent KWN interviews which included Michael Pento, Egon von Greyerz, Gerald Celente, Andrew Maguire, James Turk, Rick Rule, Nigel Farage and Bill Fleckenstein by CLICKING HERE.

Eric King

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