Let me be frank, the timing of QE-infinity is not suspiciously political, it is an overt slap in the face, it's tingly feelings running up and down every part of Ben Bernanke that bends. In order to know how to play QE-infinity(QE-I) we must first establish that the timing of it is purely political in nature. The gas Ben just dumped on the fire only burns for 2-5 months and we all knew the "Twist" wasn't helping unemployment back in June. Whether or not Ben and company actually believe they are reducing unemployment in addition to helping President Obama is irrelevant, the point is that everyone including Ben knows that the QE gas burns quick so any market play needs to beat the rush for the exits or take advantage of it.
Progressives who think this is actually going to reduce unemployment should be reminded of the ironic fact that any minuscule up tick in unemployment that this policy may incur can only come from trickle down, trickle down theory. Giving elite bankers billions of dollars and hoping the money snakes it's way through the hedge funds and medium sized banks, then drips into the pockets of big business and finally makes its way to you and me is trickle down squared. Liquidity be damned, the banks will not lend more into an economy coming off record high levels of consumer debt with declining middle class income. The market did not jump yesterday because they think a solution to unemployment has been found, rather the street is betting on which assets will be a part of the next bubble.
QE-Infinity can only hope to reduce unemployment through a temporary boost in asset prices, and that starts with MBS held by the big banks. When the fed buys mortgage backed securities the big banks will buy another asset such as commercial paper and a hedge fund that just sold the paper will now have excess liquidity and may increase their holdings in yet another asset such as foreign currency. This is precisely what happened to the Brazilian real in the last round of QE. Which went from meandering aimlessly to rocketing up to pre-crisis highs as a direct result of QE-2. Things got so out of control that the finance minister of Brazil, Mr. Mantega labeled the US a currency manipulator and compared QE-2 to starting a trade war. More importantly the Real bubble burst when QE-2 ended in August 2011. Suddenly Spanish Bond yields also began to reflect reality as they had also been dragged into a hidden QE induced bubble.
The Key to Understanding QE-I is knowing that it has NO substantial effect on the unemployment rate but will cause bubbles in assets. Because no one knows where the next asset bubble will be most assets increase in price. Initially assets have no new downside risk but they have a new bullish possibly of getting caught up in a QE caused bubble like the Brazilian Real did. In later stages, QE has the opposite effect as the fear and uncertainty that the asset you own is being inflated by QE reduces the price of that asset compared to what it would have been without QE. Given the prior history of rounds one and two, I expect QE-infinity to be bullish for only 2-5 months after which the uncertainty surrounding the program could have a net negative effect of dragging most of the market lower than it would otherwise be in as little as nine months to a year. In any event, by dumping gas on the market at the most opportune time imaginable Mr. Bernanke let us know who he will be voting for in November.
Disclosure: I am short TLT.