Following the price trajectory of the exchange traded fund for oil, United States Oil (NYSE: USO), leaves no doubt that Federal Reserve Chairman Ben Bernanke will introduce Quantitative Easing 3 or some other major economic stimulus program when he speaks this Friday at the economic policy summit in Jackson Hole, Wyoming.
Despite falling economic growth around the world, the USO is up 6.27% for the last month of market action. With a short float of 50.45%, many are betting that it will fall; as a short float of 5% is considered to be a sign of trouble for a security.
But the USO certainly did not fall during the time of Quantitative Easing 2. Introduced by Ben Bernanke in his Jackson Hole speech in August 2010, Quantitative Easing 2 consisted of the Federal Reserve inflating its balance sheet to purchase around $700 billion in US Treasury Bonds for the period November 2010 to June 2011.
As no other investors, either foreign or domestic, could be found to buy US Treasury Bonds at such low interest rates, the Federal Reserve became the “buyer of last resort.
That continues to this day with Operation Twist, the Federal Reserve program of selling short term securities to purchase those with a longer term. As economic growth in the United States is falling with unemployment rising, the Federal Reserve recently issued a statement that more had to be done.
If Quantitative Easing 3 is initiated, then the US Dollar (NYSE: UUP) will likely fall as it did for Quantitative Easing 2. As a result, traders will pile into commodity assets such as the USO. Even if Quantitative Easing 3 is announced, it will not start until after November, just like Quantitative Easing 2. This is an election year, as was 2010, and the Federal Reserve must remain neutral.