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What QEII Means to Your Portfolio

The Fed has analyzed the economy, and they have spoken…and coughed and choked and has set us forth upon a path once again lined with money. Mine, yours, and all they could borrow from our children. Six hundred billion more this time around, but this time will be different they say, and this time its going to work, until it doesn’t, and then we’ll print more.  

The stock and bond markets love the idea of more new free money, as speculators and traders are clamoring over the news like an addict in need of his next fix. Never mind the fact that the Fed is not pumping more money into the economy because things are rosy. In every previous post-recession cycle, GDP growth would typically be over 5% by now, but this is not a typical business-cycle recession; it’s a deleveraging, credit-crisis recession, which take a lot longer to get through. That said, stocks can still go higher even though the economy stinks, as discussed in “Seeing the forest for the trees” .

This new QEII is designed to put additional liquidity into the financial system through open market bond purchases, thereby driving down interest rates and “hopefully” inducing banks to lend more. Certainly, a lower interest rate environment is more conducive to recovery; however, unless banks lend more and businesses use these new loans to expand output and hire more workers, nothing will change other than we get another day older and deeper in debt.

Clearly they are trying to buy time for the consumer to come back to their old frivolous ways of spending. Unfortunately the massively over leveraged consumer is tapped out. Add that to the natural demographic cycle of the aging baby boomer who is well past their peak spending years, and you’ve got a long wait ahead. They could make money absolutely free to borrow, and people are not going to buy houses and borrow to buy other things they don’t need. In addition, businesses are not going to borrow more simply because it’s cheap. They don’t need more debt, they need more customers!  

Sure, this new QEII will help push the markets to new heights over the short term, and for that we should all be thankful. However, this new round of stimulus will also devalue the dollar, further lower returns for retirees to live on, and raises basic expenses for the average family struggling through this recession. However, more importantly as I have warned in issues past, it just creates another bubble just like we saw in 2000, early 2007…and we all know what happens to bubbles…they burst. Therefore investors should focus on the “Sweet Spot” in the market, but have their exit strategy ready.



Disclosure: "No Positions"