One of the biggest stories in the financial world over the past few weeks has been the development of “QE2,” the Federal Reserve’s decision to once again attempt to breathe life into the U.S. economy through injections of capital designed to drive down interest rates. The Fed plans to spend about $600 billion on the purchase of Treasuries, mostly in the short-term and medium-term debt markets, in a campaign that would ideally boost bond prices and drive capital into other sectors of the economy. Not surprisingly, the reception to the plan from an increasingly divided Washington (and an increasingly divided country for that matter) has been mixed. While some investors and economists are optimistic, others have been quick to point out that the same idea didn’t exactly work out the first time around, and that Japan has remained stuck in an economic malaise for the better part of two decades despite quantitative easing campaigns of its own.
As a fresh injection of capital begins to course through global financial markets, critics of the U.S. policy are popping up with increasing frequency. Many are growing worried that the recent developments could further destabilize the dollar, which remains the world’s reserve currency and thus the medium of exchange for a variety of important commodities, including virtually all major food staples and oil. “For the U.S. to undertake a second round of quantitative easing at this time we feel is not recognizing the responsibility it should take as a reserve currency issuer, and not taking into account the effect of this excessive liquidity on emerging-market economies,” China’s Vice Finance Minister Zhu Guangyao told reporters at a press conference in Beijing.
China is not alone in its criticism of QE2, as a number of foreign countries have joined in the chorus. Rebukes of QE2 have come from historical rivals such as Russia, but also from traditional allies, such as Germany. “They have already pumped endless amounts of money into the economy with extremely high budget deficits, and with a monetary policy which has already pumped in lots of money,” said German Finance minister Wolfgang Schauble. “The results have been hopeless.” As leaders of the world’s wealthiest nations prepare to gather in Seoul for the upcoming G20 summit, the U.S. delegation seems likely to meet a hostile reception and harsh rounds of questioning related to its recent policy decisions.
The complaints against Fed’s moves have not been limited to foreign governments, as conservatives have also joined in on the attacks against the central bank. One of the harshest critiques of the recent round of quantitative easing came from “deeply concerned” former Alaska governor and Vice Presidential candidate Sarah Palin, who warned against the potential pitfalls of further “pump priming.” The argument laid out by Palin’s economic team focuses on the uncertainty that QE2 will accomplish its stated objectives, and the diminishing range of policy options if it fails to kick start the U.S. economy.”Do we have any guarantees that QE2 won’t be followed by QE3, 4, and 5, until eventually – inevitably – no one will want to buy our debt anymore?” said Palin in prepared remarks delivered earlier this week.
Palin also highlighted the global reaction to the Fed’s latest plan. “When Germany, a country that knows a thing or two about the dangers of inflation, warns us to think again, maybe it’s time for Chairman Ben Bernanke to cease and desist,” said the one time vice presidential candidate, according to the remarks obtained by National Review. “We don’t want temporary, artificial economic growth bought at the expense of permanently higher inflation which will erode the value of our incomes and our savings.”
While many might dismiss Palin’s concerns given her lack of monetary experience, her views are shared by many policymakers and economists, especially those from countries concerned that another misstep by the U.S. could have an adverse impact on global economic growth through inflationary pressures. The clock is now running on the latest strategy for stimulating job creation and delivering a platform for sustainable growth in the U.S. economy. Bernanke and company are clearly convinced that another round of QE is the right step, and a number of economists and politicians are on board. Sarah Palin may not be the most qualified to argue the potential pitfalls on the current path, but her high profile and controversial persona have once again thrust her into the spotlight–this time one that is focusing on a critical monetary policy issue.
Many investors are hoping that Palin is dead wrong in her analysis of QE2 and that the Fed’s actions get the economy back on the right track. But they are also concerned that she is right in her assessment, and that the current initiative will only dig the hole deeper. Such a development would obviously be bad for stocks, but could give a boost to certain asset classes. Below, we profile three ETFs below that could benefit from if Palin is correct and QE2 is a poor plan:
3x Short 25+ Year Treasury Bond ETN (NYSEARCA:SBND)
A collapse in confidence in U.S. debt would be great news for SBND, a leveraged exchange-traded note linked to an index that tracks the performance of Ultra T-Bond Futures. Ultra T-Bond Futures are futures contracts traded on the CBOT whose underlying assets are U.S. Treasury Bonds with a remaining term to maturity of not less than 25 years. According to the ETN fact sheet, the underlying index maintains a correlation with the S&P 500 of just 0.41 and a -0.49 correlation with the Barclays Capital U.S. Aggregate Bond Market.
As investors have grown increasingly concerned over QE’s impact on the long-term sector of the bond market, these securities have tumbled in price as investors move their capital into shorter-term issues. This has helped to send SBND sharply higher in recent weeks, pushing prices up 19% over the past four weeks and 6.9% over the past week. If confidence in U.S. debt markets wanes in coming months, SBND could emerge as a primary beneficiary.
WisdomTree Dreyfus Emerging Currency Fund (NYSEARCA:CEW)
Emerging market currencies could be positioned to benefit from the Fed’s policies for two reasons. First, the extra cash sloshing around in the markets could flow towards red-hot emerging market economies that have distanced themselves from the struggling developed world. Second, a further crisis of confidence could weigh on the dollar, which has already been battered in recent weeks as investors formed expectations over the Fed’s intervention plans. This fund from WisdomTree offers exposure to a broad basket of currencies that could appreciate if the dollar encounters additional turbulence, including the Mexican Peso, Brazilian Real, Chilean Peso, South African Rand, Polish Zloty, Israeli Shekel, Turkish New Lira, Chinese Yuan, South Korean Won, Taiwanese Dollar, and Indian Rupee.
The goal of CEW–which is actively managed–is to generate total returns reflective of both money market rates in selected emerging market countries available to foreign investors and changes to the value of these currencies relative to the U.S. dollar. As such, CEW can be thought of as a money market fund that layers on exposure to emerging market currencies. As the greenback has crumbled, CEW has posted a gain of close to 6% over the last six months.
ETFS Physical Precious Metal Basket Shares (NYSEARCA:GLTR)
In recent weeks a lack of confidence in the Fed’s policies–as well as rising anxiety over inflation–has sent precious metals sharply higher. Gold prices have surged by close to 20% over just the past quarter while silver has put up an even more impressive 59% during the same time period. The rest of the precious metal group–platinum and palladium–also have gained significantly on the year as investors have turned to hard currencies to hedge against the dollar.
One brand new way to play all of the precious metals in one ticker is GLTR from European-based ETF Securities. The company houses all of the metals in secure vaults in either London or Zurich. Each share of the trust consists of approximately 0.03 oz of gold, 1.1 oz of silver, 0.004 oz in platinum, and 0.006 oz of palladium. At current prices, that results in a basket that is tilted towards gold and silver, with smaller allocations to platinum and palladium. If QE2 stokes the inflationary flames, precious metal demand could continue to climb, and GLTR could be a big winner.
Disclosure: No positions at time of writing.
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