Montreal, Canada

It’s already conventional wisdom among investors that the end of the Fed’s QE II program ends in June. And with the economy showing signs of life since late 2010, the odds that Fed boss, Bernanke, will unload another firing round, is unlikely unless the economy softens again.

I don’t dismiss another episode, or several more doses of QE; but I don’t think we’ll see QE III in 2011.

Bill Gross, founder of PIMCO, the world’s biggest fixed-income manager, believes the Fed’s exit in June will cause a massive “sucking sound”, a vacuum of black-hole equivalents once this round of purchases ends. He’s right. The Fed’s exit from debt monetization will leave a gaping hole in U.S. Treasury funding at a time when the Chinese and the Japanese are buying less, not more of Uncle Sam’s promissory notes. Hence, rates must rise.

The markets have not discounted the Fed’s exit – not yet.

I suspect this significant drain of liquidity will result in a lousy summer for risk-based assets with a good buying opportunity later in the year. Stocks have almost doubled since March 2009 and credit spreads have all come in, meaning they’ve normalized. Commodities have gone through the roof.

For commodity investors, the summer is usually the worst time of the year to be invested. Seasonal trends from May until October also affect stocks; yet with the exception of 2009, I can’t remember a summer since 2000 when commodities didn’t get trashed.

The only exception might be natural gas, a commodity that typically runs counter to other raw materials and usually shows gains in months when stocks plunge. Veteran commodity trader, Andy Hecht, believes natural gas will head to $5 per million BTU.

With the threat of NATO involvement growing in Libya, more conflicts spreading in the Middle East combined with soaring oil prices makes for a nasty environment for risk-takers. Throw in the Fed’s exit in a few months and you have the ingredients for a sharp decline in global markets – long overdue by most measures. A spike in Treasury interest rates won’t help.

Liquidity has been bountiful. It won’t last beyond the summer.