With little fanfare or hoopla, Ben Bernanke and his financial puppeteers at the Federal Reserve initiated QE4. In doing so, they tightened up the criteria from a target date of "a few years in the future", to specific requirements that need to be satisfied in order to stop the printing press. These conditions include: the unemployment rate dropping to 6.5%, inflation projections being no higher than 2.5% looking 1- 2 years ahead, and long-term inflation expectations remaining well-anchored. Interestingly enough, this will change little as the target unemployment rate mentioned is not forecasted to occur until at least 2015.
With the end of "Operation Twist" (which consists of selling short-dated and buying longer-dated government debt to flatten or 'twist' the natural yield curve) the Fed will now buy an additional $40 billion dollars of bonds, making their purchase equal to at least $85 billion/month (split roughly equally between Treasuries and MBS). This will bring their balance sheet up to $4 trillion by next year, and with no end in sight!
Of course things would be a little better if we were investing this money into something that would improve our economy, like building infrastructure. Senator Joe Manchin of West Virginia may have said it best,"We're spending billions in Iraq and Afghanistan. Let's rebuild America first. If you build us a bridge or a school in West Virginia, we won't blow it up and we won't burn it down." I must have been the only one listening.
Although the economy seems to be chugging along, we must remember that the Fed is not flooding the economy with all this free money because they think things are rosy, or even close to getting better. Stimulus programs are acts of desperation used to "hopefully" keep you from falling over a cliff (pun intended), and they work until they don't anymore. Investors must realize that this vicious spiral will continue until the root causes are corrected.
The bottom line is the Fed's announcement yesterday about the expansion of a QE4 is a game changer. Inflationary risks have just been elevated. Apparently they feel like they do not need any checks and balances, and are free to flood the economy with ever increasing newly printed dollars. Of course all the existing programs have had little repercussions, as the bond market has allowed this deficit spending to run amok, for now. The worst part for me is the level of complacency we are witnessing from investors, and complacency is one of my top indicators for a market top. If next quarter's corporate earnings disappoint again, run for the hills.
Once the fiscal cliff is solved, and yes it will be, I do expect a pretty good rally. Even so, the risks are high. Of course you can't sit in the bank earning next to nothing either. There are plenty of ways to make money in this market and in the dangerous market ahead, but the key is to do it without all the risk. Aggressive investors should position themselves for a strong rally and buy high quality tech companies with a strong brand. These would include: Apple (AAPL), Google (GOOG), Intel Corporation (INTC), Qualcomm (QCOM), Microsoft (MSFT), Cisco Systems (CSCO), Yahoo (YHOO), and VMware Inc. (VMW). The funds with more diversification and less individual company risk are also the ones to buy, like the SPDR S&P 500 (SPY), PowerShares QQQ Trust Series 1 (QQQ), and iShares Russell 2000 (IWM). Commodities are still screaming buys with continued stimulus, such as Goldcorp Inc. (GG), Barrick Gold Corp. (ABX), SPDR Gold Shares (GLD), Power Shares Double Gold (DGP), Market Vectors Gold Miners ETF (GDX), Newmont Mining Corp. (NEM), Freeport-McMoRan Copper & Gold Inc. (FCX), plus Silver Wheaton Corp. (SLW), ProShares Ultra Silver (AGQ), and Fortuna Silver Mines (FSM).