By far the biggest story in the markets now is the Federal Reserve’s game-changing announcement about what has been aptly dubbed "QE Infinity." Last week, Fed Chairman Ben Bernanke and crew essentially pushed the monetary panic button by announcing an ultra-aggressive plan to expand the U.S. central bank’s existing mortgage backed security purchase program to $40 billion per month. That’s a massive amount, but the real kicker here that makes this situation a game changer is that the Fed announced it would buy this amount of bonds for an unlimited period of time.
The goal of the new QE3 policy is to drive mortgage rates down and stimulate the housing market, to revive the labor market, and by extension, to improve the economy. So far, the Fed hasn’t been able to do much to achieve its goals, and QE1 and QE2 haven’t worked, so hey, why not QE3?
I guess the idea is the bigger and more aggressive the policy, the better chances of it working.
Now, as you might suspect, I am very skeptical about whether this new monetary action will do anything for the real economy. Why? Well, because printing more money doesn’t stimulate the economy, it only creates cheaper dollars.
The one thing that creating cheaper dollars does do is cause equity prices and commodity prices to soar. We saw that situation take place the day Big Ben brought us the news, as the Dow staged another 200-point surge immediately following the Fed’s landmark announcement.
We’ve also seen a huge spike higher in gold, as seen here by the chart of the SPDR Gold Trust (GLD).
To be certain, the pledge to keep buying bonds has the effect of driving hard asset prices higher. That’s what happened after QE1 and QE2. Now, it’s likely to continue happening during "QE Infinity."
Smart investors need to be aware of this situation, since the action in the market likely will continue to be driven by the Fed. And even though the real economy still struggles with anemic growth at home, a recession in Europe and slowing growth in China, the U.S. central bank’s commitment to money printing likely will trump these negatives.
How long will this situation last? Well, no one knows for certain — but when the bottom finally does fall out, things are going to get ugly for equities or gold, so consider yourself warned.