http://albertpeia.com/hereandthere.htm
‘On
Thursday last week, the US Federal Reserve announced QE 3: a program through
which it will purchase $40 billion in Mortgage Backed Securities (MBS) every
month going forward.
Given
the close proximity of this move to the European Central Bank’s (ECB)
“unlimited” bond purchasing program announced the week before, the Fed’s move
should be taken as a coordinated Central Bank intervention. Thus, we have both
the ECB and the Fed going “all in” on their efforts to support the Global
Financial System.
This decision
will not be without its consequences. Inflationary pressures were already high
in the US and around the world. They will be going higher as a direct
consequence of the Fed’s move.
Indeed,
Oil is back at $100 per barrel. Gold has broken out of its wedge pattern and
will likely hit new highs before year-end. And Agricultural Commodities are
approaching records due to both severe droughts in the US combined with the Fed
and ECB’s announcements.
The
Fed has never been good at anticipating the consequences of its actions (see
the Arab Spring that resulted from QE 2’s impact on food prices). So we have to
ask ourselves, “has the Fed gone too far this time in its efforts to boost
stock prices?”
Our
initial view is “yes.” Stocks were already at four-year highs before
QE 3 sent them soaring. Our primary concern now is that by announcing QE 3 at
this time, the Fed has removed the primary driver of stock prices: the anticipation
of more Fed intervention.
Remember,
the NY Fed has admitted publicly that without the investor anticipation of Fed
action, the S&P 500 would be at 600 today. Thus, by making QE 3 an “open”
or “unlimited” program, the Fed has removed this anticipatory effect as going
forward investors already know what the Fed will be doing in the
future.
Moreover,
this open-ended intervention has dramatically raised the bar for any future
potential Fed action. Barring a systemic crisis or the collapse of a major
bank, the Fed’s hands are now tied due to it having an ongoing intervention in
place.
Which
leads us to the multi-trillion Dollar question: what if this QE program proves
to be a dud? What if the Fed, by announcing such a program, has not only
removed the anticipation of future Fed action, but has in fact played its hand too
far?
After
all, stocks are now extremely overbought and due for a correction. What would a
correction do to investor perception of the Fed’s abilities coming so soon
after a new large program such as this?
These
are the issues to consider going forward. Our view is that it is quite possible
the Fed has played its hand too strongly and thereby damaged its future efforts
to maintain market stability via intervention. Given that stocks were already
decoupled from the underlying economic realities, this has made the market
highly vulnerable to a sharp correction.
And
then of course, there is the coming inflationary storm to consider.
On
that note, we are currently preparing a Special Portfolio of unique inflation
hedges: investments that will not only maintain their purchasing power but will
outperform even Gold and Silver as the Fed and ECB debase their respective fiat
currencies.
We’re
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unaware of: asset plays trading
at massive discounts to their underlying values. The kind
of investments that can show you double-digit returns in a very short period.
This
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Wealth Advisory newsletter. The last time we opened a similar
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similar returns this time around as well.
To
find out more about Private
Wealth Advisory and get on board for this Special Inflation
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Phoenix
Capital Research’