QE3, A Prudent Investment Strategy

| About: iPath S&P (VXX)

As the ECB meeting comes and goes all eyes are going to re-focus on Bernanke, but a sad truth exists. Although Europe is only now joining the party and pasting their credit markets together, and that makes their bond purchases have a bigger impact, we are much further along the economic cycle, and additional easing by the Federal Reserve will only have a marginal impact, it any at all.

In effect, the US Federal Reserve is out of real bullets, and the ones they are using now are instead something else altogether. Instead of actually taking action, the current Fed Policy seems to be to talk about taking action. Commendably, talking about easing may actually have the same impact on psychology as easing itself, because it makes investors more comfortable, but the build-up that these assurances carry with them can lead to a cliff of a completely different color.

The Fiscal Cliff, which looks almost unavoidable, would be a fitting 1-2 punch to a market that ultimately gets disappointed by the QE3 program that the market is pricing in today. They think it will save the day, create jobs, and make everything rosy again in America, but it will not have that impact. In fact, it may be so meager that the wind gets ripped completely from the sails of the equity market, which is so dependent on government support.

Interestingly, it is big business that usually wants smaller government, but all of Wall Street seems to be looking for a handout from the Federal Reserve. I guess it depends on what part of the Government you are talking about when the topic of 'Big Government' comes up.

Reasonably, with continued easing what is already a weak economy would turn to recession, and then eventually depression, so easing is required to keep the economy afloat, but just like investors stopped paying up for inflationary growth in the 1970s, when P/E multiples fell to the floor, the same will happen here in the not too distant future. The Market is currently very expensive on a PEG-ratio basis, it is pricing in the best case scenario, but unfortunately it is not going to get what it wants.

In this case, either GDP levels need to skyrocket, which no one expects, or prices need to adjust lower, and a price adjustment is what I am suggesting happens. For speculative investors, take 1% of your portfolio and put it into the 2x Vix ETF (NYSEARCA:VXX). For the rest of your portfolio, engage proactive strategies that can make money regardless of where the market goes, regardless of what happens to the economy, regardless of who becomes President, what happens to Europe, or the day to day economic data that otherwise distracts us. The simple truth is that these are tough times, there will be corrections in the market again, but if we use proactive strategies none of that needs to hurt us. That is what prudent investing is all about. Control your risk and get ahead of the curve.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.