Last week, I discussed how the European Central Bank has lost its marbles, launching its own version of quantitative easing. I dubbed it “QE-E.”
I also said that QE accomplishes almost nothing for the “real” economy, even if it juices asset markets. And sure enough, we got more proof of that this week (details to follow!).
Well, this week it was the Federal Reserve’s turn at the podium and what happened? Policymakers didn’t launch an official QE3 program. But they did promise to keep short-term interest rates low through late 2014 … up from a previous pledge of 2013.
Not only that, the Fed also said it would continue with its “Operation Twist” policy of selling shorter-term Treasuries and buying longer-term ones. The goal? Hold down long-term interest rates.
Noted bond fund manager Bill Gross of Pimco dubbed it “QE2.5.” All I could do was shake my head!
What QE Does —
and Doesn’t — Do!
If all this QE talk has you confused, I understand. Wall Street jargon can be a bear to decipher. So let’s just keep things simple and explain what QE is: Money printing by a country’s central bank. And what does that money printing do?
Pumping more cash into the economy soon leads to higher prices for everyday items. |
It devalues the currency of the country doing the printing …
It erodes the purchasing power of the country’s citizens …
It inflates the price of commodities, making every gallon of gas you buy and many of the groceries you purchase more expensive …
It drives down the yield on virtually all of your savings vehicles, forcing you to scrounge for pennies in your couch cushions or take on huge risks to generate the same amount of income you made previously …
And it artificially boosts the value of paper assets, including everything from junky bonds to stocks.
In other words, if you’re an average American, you get screwed!
But if you’re a seven-figure-salary investment banker at Goldman Sachs, you hit paydirt. You can peddle more stocks and bonds, make a lot of money doing so, and maybe afford a new Ferrari or house in the Hamptons.
Ain’t life grand?
The fatal flaw of QE, though, at least in terms of its impact on the REAL economy, is those pesky side effects. Sure, QE temporarily juices stock prices. But because it also drives up the cost of living, it drives down the disposable income of everyday citizens. Eventually prices rise so high that no one can afford them, and that’s when the economy collapses.
And even during that “honeymoon” period when stocks rise, QE doesn’t really help the economy …
The latest example came just this week from the U.K. The Bank of England bought 200 billion pounds of assets there as part of its QE1 program a while back. Then it launched a 75 billion pound QE2 program in October.
What happened as a result? The country’s economy shrank a greater-than-expected 0.2 percent in the fourth quarter of 2011. That puts the U.K. on the verge of a double-dip recession. Oops!
What to Do …
Last week, I talked about the potential for QE-E to prop up the asset markets regardless of the fundamentals. Now we have the Fed piling on with its own version of “QE 2.5.”
Never mind that it won’t work, at least if by “work,” you mean help the real economy. Fed policymakers like Ben Bernanke aren’t going to let the facts get in the way of a good story. They need to look like they’re not just sitting on their hands. So they’re going to keep doing the same wrong things, expecting a different result.
The best way to protect yourself is to own some gold, own select fixed income investments that do NOT pose excessive risk, and own select stocks with solid fundamentals. That’s what I’ve been recommending to my Safe Money subscribers.
They should be in a good position if the weak global economy persists, and they’ll get an extra boost from all the easy money sloshing out there. To see how you can join them and receive specific guidance on “what,” “when,” and “how” to buy, click here.
But if you choose to go it alone, just be sure to keep one eye on the exit doors — because down the road, QE 2.5, QE-E, and all these other harebrained programs will fail just like their predecessors did!
Until next time,
Mike
{ 16 comments }
The Fed outsmarted Weiss Research. Instead of the market going down it will now go up. No more inverse etfs. Even Dr. Doom says he doesn’t think things will fall apart until possibly as late as 2015. Governments can kick the can down the road longer than Weiss Research can predict the end of the world.
the market might go up but the dollar is down so you have to make up for the dollar going down before you can say you made anything.
from australian
King Ralph is correct.I’m thinking of all the seniors who bought gold in the late 1970’s,because the U.S. was going down.They were correct about the situation, but mostly died with losses.It’s really amazing, the ability of the U.S. govt to put off the day of reckoning.I don’t think there is much chance of govt raising interest rates to kill off the inflation boom,until Americans become more concerned with high inflation than unemployment or the Dollar goes into freefall.So,unless Americans wake up and notice all the current inflation or foreigners give up on the Dollar and it goes into freefall,the long term trend remains in place.Lower fiat and higher real asset prices.Hold the gold(and real estate and great stocks) and dump the Dollars.
Best explanation of QE I have seen to date. Thanks Mike.
All it needs is a black swan event to take this stack of cards down! The FED will not be quick enough to react – like 2008 all over again. Safe to go short when key trend lines are broken, which they are not at present. I am waiting to go short, but not yet.
Mike Larson advocating people to go long is the ulimate contrarian indicator.
This is a signal to go 200% short. Mike has a tendency to write the most bearish opinions at market bottoms and things quickly turn south after he tells people to go long.
Dear Mr. Weiss: I have been a major thorn in your company side for 2 years now. Your entire team including Klaus always yelled a top in the stock market. I am telling you now on January 27th you better be short the DOW. We have a rising wedge top on the 5th wave. We have sinking volume on the last leg up. The histogram on the daily is getting ready to go negative and the MACD is ready to cross over. I am yelling at the rooftop to short the dow jones immediately. I am also saying that the bond market has reached an all time top. I would be layering on shorts for the bond market. The DOW utilities have already topped out weeks ago. The utilities will drive the stock market down which will lead to higher rates. I also stated to you that natural gas will be heading to the moon. I am very very bullish on natural gas and nat gas stocks.
I agree with your short call Mike. My entry point is SPX 1292 (Below a key trendline), increasing my stakes with an initial target of 1200 – 1100 range in 2 weeks. I would not be surprised to see SPX 900 – 800 range before the year is out. This is my conservative forecast. If all hell breaks loose, then a test of the SPX 666 low becomes viable. Liquidity or not – there is no way I want to be in this market on the long side. I have too much knowledge regarding the 1929 and 1987 crashes. We could be in a big a bull trap I am pretty sure. Tom Demark (Advisor to George Soros), Joe Granville (expert market caller for 50 years) and Robert P at Elliot Wave International (history going back to 1979 book), not to forget Larry Edelson all see lows this years, and I tend to agree. I know which camp I belong to.
Like I said careful entry with stop-loss at 1385 if I’m wrong.
It’s a dangerous proposition trying to call major market tops. Right now the market is in a strong uptrend. The VIX dropping below 20 indicates traders no longer fear a Lehman type event out of Europe. Robert P of Elliot Wave has a history of making unreliable predictions. I saw him on TV a few months ago and he stated he thought the rally from the March 2009 bottom would end when the S&P hit 1100. We are way above that now and this rally has gone on much longer than he anticipated. He also predicted the DOW would hit 1000 by now and that hasn’t happened either. I follow Larry Edelson and he was predicting Dow 9000 last year and when that didn’t happen he kept pushing the time frame forward. I’ve heard of Granville but don’t follow him. The prospect that utilities are going to drive the market down seems unlikely because if money is coming out of that sector it will likely find itself moving into riskier sectors. I do agree that bonds are topping but that money will also go into stocks and commodities. Hence all the indications are there that this market wants to move higher, in my humble opinion of course.
Hi KR,i agree, yes it probably does want to go higher, hence my small entry short only below a key trend-line. The more it goes up, the more it will collapse. I’m on the sidelines waiting like many to short the hell out of the market once it cracks. All the timings are out because of the money printing and goings on behind the central bank doors. It can’t go on forever. They are digging themselves into deeper holes. Like I said when it cracks, it will collapse , and Robert P,Granville,Mike Larson and Edelson will be gods.
Mike, if you propose to know everything QE does and doesn’t do, ??..how come your subscribers are so broke and will never be able to gain back the value of their current losses because of the forces you speak to know of…..
You are doing to your subscribers exactly what you think you are protecting them from…devastating their portfolios…..they will NEVER, EVER come close to break even following you because of the forces you propose…
Wait till inflation comes, as you propose, to further crush them….
The LAST thing you and MArty are doing is preparing your subscribers for the future….you are truly mentally ill…
Thinking, hoping, wishing, praying, waiting….Bears are just thining, hoping, wishing, praying and waiting…
That’s a great investment strategy!!!!!,,,,
We have one thing in common, though….I can’t WAIT for the markets to drop about 2,000..all the way down to…let’s see…um…yeah..10, 700!!…big deal.
..and such a move will not be bear-sh but one of the biggest Bull moves ever!!!….
Martin and Mikey have it so wrong in so many ways…and their results prove it….
Bears…just kepp sitting and hoping…while the exact forces you crow about are destroyng your principal…..idiots…
I think what I’ll do as an investment strategy is sit around and wait for a Black swan event….I’ll never see it coming…don’t know how long it will last??..don’t know how expensive my entry will be when i try a start that everyone else will be trying 9very expensive)…
or??….I might educate myself on a few things…and not be such a coward….
I have a checklist of 10 itmes before i bust a move to riches….My top 3 are embedded in this article….bet you loser Bears have no idea…
http://www.cnbc.com/id/46223498
Sitting and waiting….that’s a great strat…
Black Swans…Black Swans……kinda interesting take on Black Swan events..
http://www.minyanville.com/businessmarkets/articles/technical-analysis-market-analysis-market-market/2/1/2012/id/39161?camp=syndication&medium=portals&from=yahoo
Mike, what’s with the 24/7/365 smirk ?
Black Swans…Black Swans…run away…run away…..
Man…where’s my good buddy, Michael with his fer sure 7,000 DOW..heck…it can’t even get to an 11,000 DOW…
What a bunch of maroons…