QE3

QE Infinity Won't Work, But Here's What Will

Dallas Federal Reserve President Richard Fisher recently offered a stunning assessment about our policymaking central bankers down in Washington.

They're winging it.

In a talk before a Harvard Club audience, Fisher presented a candid assessment about all the levers the Fed has been pulling in the aftermath of the 2008 financial crisis. And that includes the recently announced QE3.

"Nobody really knows what will work to get the economy back on course. And nobody-in fact, no central bank anywhere on the planet-has the experience of successfully navigating a return home from the place in which we now find ourselves. No central bank-not, at least, the Federal Reserve-has ever been on this cruise before."

I don't know about you, but the idea that four years and trillions of dollars into this quantitative easing voyage we're still sailing without a compass isn't just appalling.

It's terrifying.

Yet this ship of fools sails on.

The problem is, Fisher is right: QE3 won't work. QE1 and QE2 didn't fix this mess. Nor will QE4, QE5, onwards to infinity.

What's more, there's a cottage industry of pundits and consultants who'll agree.

Trouble is, just like Fisher and his colleagues at the Fed, none of them can tell you why it won't work.

That's what we're going to do here today.

We'll start by giving you the lowdown on how this nation's central bankers view "Quantitative Easing." Then we'll show you how the Fed thinks QE is supposed to work.

Finally, we'll punch some (actually, many) holes in in the Fed's hull by discussing why it's not working.

We'll even demonstrate what could still be done to fix this wretched mess.



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QE3 Will Give Rebounding Homebuilder Stocks An Extra Push

QE3 - Federal Reserve Chairman Ben Bernanke's $40 billion-a-month booster shot - could be just what the doctor ordered to keep homebuilder stocks surging.

The Fed's buying of mortgage-backed securities (MBS) is designed to help push down 30-year mortgage rates -- a major incentive for consumers to buy a house.

And now with QE3 (the third round of quantitative easing), the central bank has promised to keep buying $40 billion per month of MBS until...well, until forever if needed.

The strategy is already working. Last week, just a month after QE3 was announced, mortgage interest rates fell to the lowest level on record.

The average 30-year loan stood at 3.39% as of Oct. 11- down from 6.1% at the start of the recession in December 2007.

And the Fed has said it plans to keep its own federal funds rate, a benchmark for interest rates, at "exceptionally low levels" at least through mid-2015.

Such policies, designed to jumpstart the economy by boosting the housing market, necessarily benefit homebuilder stocks as well.

"You get more benefit when people buy homes," Bernanke says. "It's the purchases of new homes that generate the construction activity, the furnishing, all those things that help the economy grow."

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QE3 and Low Interest Rates Help Savers? Bernanke Thinks So

U.S. Federal Reserve Chairman Ben Bernanke wants you to believe his cheap money, low interest policies like QE3 actually have benefits for savers.

America's savers, many of whom are retired or nearing retirement, would beg to differ.

You see, low rates at the Fed - which has pledged to keep its interest rates near zero at least through 2015 - means low rates on conventional savings vehicles like bank accounts, certificates of deposit, and money market funds.

Those rates affect $10 trillion in savings-like products, costing savers billions of dollars.

For example, if a saver had $100 in a savings account in 2008 that paid 0.35% interest, she'd have just $102 today. But with inflation, $100 worth of goods in 2008 now costs $107.

That's a loss of 5% in four years, the sort of math that eats away at a retiree's standard of living.

And the rates of 2008 look fantastic compared to what's available now.

The Fed's actions have pushed down interest rates to microscopic levels. The average savings account interest rate has fallen one-third in the last year alone, to 0.08%.

The average yield on five-year CDs last month dropped below 1% for the first time ever. Back in 2007, five-year CDs provided a yield of 4%.

And yet in a speech he gave at the Economic Club of Indiana on Monday, Bernanke said his policies are helping savers.

Here's why.

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How QE3 and Higher Inflation Are Part of the Fed's Master Plan

U.S. Federal Reserve Chairman Ben Bernanke might not admit it, but he just drastically increased the inflation risks for 2013 and beyond.

That's because Bernanke pledged on Sept. 13 that QE3 -unlike the stimulus programs before it - will continue for an unlimited timeframe.

QE3 has already led to a rally in commodity prices, like the previous Fed stimulus actions.

But this time the inflationary surge will get much, much worse.

"If the governments and central bankers continue to flood the world with cheap money, it has to translate into some kind of inflation," Money Morning Global Investing Strategist Martin Hutchinson recently explained. "We started with asset inflation. But my sense is that the transition from asset inflation to consumer inflation will happen very quickly."

With median income levels at averages not seen since the mid-90s, U.S. households need to prepare their savings to survive higher prices - especially while interest rates remain near zero.

Unfortunately, it appears this environment is exactly what Ben Bernanke has in mind.

"Not only will they tolerate higher inflation, not only will they wish for higher inflation, but they actually may target higher inflation," PIMCO CEO Mohamed El-Erian told CNBC ofthe Fed. "This is a historical bet that our kids will be reading about in history books."

Here's what Bernanke has planned.

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U.S. Stocks 2012: Can Bulls Keep the Charge Into Q4?

Historically, September hasn't been kind to stocks.

But a noticeable trend is emerging.

In the past seven Septembers, the Dow Jones Industrial Average has risen five times. And while the last trading day of September 2012 ended down, it was an up month for the Dow.

In fact, the Dow has now risen in 11 of the past 12 months (May saw a 6% decline). The last time markets enjoyed that kind of stellar streak was in 1959.

For the third quarter, the Dow tacked on 4.3%, the Standard & Poor's 500 Index rose 5.8% and the Nasdaq climbed 6.2%

Year-to-date, all three major indexes have enjoyed robust gains. They headed into the fourth quarter up 10%, 14.6% and 19.6% year-to-date, respectively.

Commodities also ran higher in the third quarter. Gold glowed, gaining 8%, oil gushed higher by 8%, and the Dow Jones-UBS Commodity Index surged 15%. Gold, up 11% in 2012, and silver, up a sterling 24% so far this year, are both expected to benefit further as the Fed's free monetary stance weighs on the value of the dollar and inflation worries are amplified.

Most of September's gains came during the first two weeks as markets anticipated a third round of quantitative easing. The Fed delivered at the Sept. 13 Federal Open Market Committee (FOMC) meeting, and stocks muddled through the rest of the month suffering from a case of buy on the rumor and sell on the news.

"The third quarter story was really simple. The performance was propelled by the generosity of global central bankers," Rex Macey, chief investment officer at Wilmington Trust told USA Today.

Now let's take a look at if this momentum will surge into the fourth quarter.

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QE3 Not Required: Three Stocks Thriving Without the Fed

When U.S. Federal Reserve Chairman Ben Bernanke opened the floodgates of easy money with quantitative easing (QE3), Wall Street staged a party.

But even though the market quickly jumped to five-year highs, stocks fizzled shortly thereafter.

And that leaves investors wondering whether this market has staying power.

"The question now is if investors feel brave enough to continue to buy stocks at such elevated levels," Fawad Razaqzada, market strategist at GFT Markets wrote in a note to investors. Investors looking for a safer route should focus on companies that can thrive on their own merits -- even without an intoxicating shot of QE3.

Companies that make products we have to have - the necessities of life, in other words -- tend to be more resistant to market ups and downs.

Let's take a look at three companies that have delivered steady, reliable returns for decades -- with or without QE1, QE2, QE3 or, someday, QE99.

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The QE3 Dangers Bernanke Isn’t Telling You About

Hoping the third time is the charm, the U.S. Federal Reserve voted on Sept. 13 to launch another bond-buying program, QE3.

Equity and commodity markets cheered the Fed's move. Stocks rallied and analysts raised precious metals price forecasts.

QE3 differs from the first two rounds in that it is an aggressive open-ended purchase program of $40 billion per month of mortgage-backed securities. The buying is slated to continue until we reach substantial and sustained improvement in the U.S. economy, which won't be a short-term achievement.

The program aims to lower long-term interest rates, stoke consumer demand and bring down the elevated unemployment rate.

But some opponents think the latest stimulus measure from Fed Chairman Ben Bernanke will fail to achieve any of that.

In fact, the QE3 doubters have a lot to say - and anyone with money in the markets right now should pay attention to what could happen.

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QE3 Is Strong Medicine for Dr. Copper

With QE3, Ben Bernanke just gave Dr. Copper a shot in the arm that should carry prices to new highs.

In fact, shortly after the U.S. Federal Reserve announced its decision to launch a third round of bond buying, copper rallied to $3.84 a pound on the Comex division of the New York Mercantile Exchange, up from around $3.35 in mid-August.

But that is only part of the story...

As "the only metal with a Ph.D. in economics' because of its widespread use in industrial applications copper is an excellent bellwether for the state of global economic activity.

And right now copper is predicting a major global rebound.

"Investors' expectations for global economic growth in the fourth quarter are rising and Dr. Copper is rallying," Andrew Rosenberger, senior portfolio manager at Brinker Capital told MarketWatch.

"Copper and other assets which are linked to global growth are taking the approach of rally now, ask questions later," he said.

For investors, there are lots of reasons to like copper right now.

Let's take a look...

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Forget the Punch Bowl, With QE3 Ben's Party is Open Bar

Everything changed on September 13. It's the day Ben Bernanke promised not to take away the punch bowl.

Last Thursday, Helicopter Ben announced that the Fed would start buying $40 billion in mortgage-backed securities -- for as long as it takes. He also announced the Fed will keep rates between 0-0.25%, until mid-2015.

The goal is to keep supporting the mortgage bond market until the employment level improves "sufficiently."

But given that the last several rounds of multi-hundred billion dollar stimulus didn't accomplish that goal, it's hard to see why they'd expect this time to be any different.

Maybe it's just because Paul Krugman was right: They didn't spend enough the first two times (sarcasm intended). Or then again, maybe that's not really their goal...

Consider this: At Jackson Hole just a few weeks ago Bernanke said that, historically, there has only been limited experience with quantitative easing. Therefore central banks, including the Fed, "have been in the process of learning by doing."

Excuse me, but are you freaking kidding me?...

Did Ben skip all his history classes? Has he ever heard of the demise of Rome or Weimar Germany?

More recently, even Argentina and Zimbabwe have had plenty of experience with quantitative easing. Their zealous over-printing led to major devaluation and/or outright currency collapse.

Couldn't Bernanke have checked in with Cristina Kirchner or Robert Mugabe?

The only real difference, and I'll admit it's a substantial one, is that the U.S. dollar is the reserve currency for the world's central banks. But that won't change the outcome.

Instead it may just delay the day of reckoning. In the meantime, it's very likely going to make the situation much, much worse.

So what's the Fed really up to?

Well, here's what I think...

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QE3 Delivers Fresh Ammo for Both Romney and Obama

U.S. Federal Reserve Chairman Ben Bernanke never intended his latest stimulus program, QE3, to become an issue in the 2012 presidential election, but he had to know what would happen.

"We have tried very, very hard, and I think we've been successful...to be nonpartisan and apolitical," Bernanke said at a news conference Thursday after the official Fed announcement of QE3. "We make our decisions based entirely on the state of the economy....So we just don't take those [political] factors into account. And we think that's the best way to maintain our independence and maintain the trust of the public."

In case you missed it, the Fed's third round of quantitative easing entails the purchase of $40 billion of mortgage-backed securities each month until unemployment shows a marked improvement.

In other words, for as long as it takes.

But with QE3 arriving less than 60 days before a bitterly contested presidential election, the Fed move was bound to get caught up in the campaign.

Both sides reacted immediately, with Republicans criticizing QE3 as unnecessary while Democrats applauded.

A few Republicans even accused Bernanke of timing QE3 intentionally to boost President Obama's re-election chances.

For the record, Bernanke is himself a Republican, appointed chairman of the Federal Reserve by President George W. Bush in 2006 and re-appointed by President Obama in 2010.

But with the Fed becoming a GOP bogeyman in recent years (thanks largely to the attacks from Rep. Ron Paul, R-TX), QE3 was bound to become weaponized in this year's increasingly acrimonious campaign.

Don't be fooled when each political party throws out the following QE3-fueled lines to get your vote.

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Investing in Gold After QE3

It's been just four trading days since QE3 ended and gold prices are already up about $40 an ounce.

Prior to the announcement, gold was trading at six-month highs, but dipped slightly before Thursday's anticipated news. Upon hearing the Fed's decision, gold prices shot up 2% that day.

Here we are on Tuesday and gold prices have slightly dipped with Comex December futures declining $4.50 to $1,766.10 an ounce. Many investors have hit the sidelines to watch whether or not the Eurozone will dodge increasing doubts about its bailout agreements.

But we're still a long way from the long-term price target for gold. Can this QE-fueled rise match ones for QE1 and QE2? History does have a way of repeating itself...

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How QE3 – Like QE1 and QE2 – Will Trigger Inflation

The traditional safe haven assets of gold (NYSE: GLD) and silver (NYSE: SLV) have surged in price due to the announcement of the latest round of quantitative easing, QE3 - but those aren't the only assets QE3 will push higher.

While QE3 might seem harmless to U.S. consumers, it is present every time they gas up their cars or buy food at the grocery store.

In fact, all three rounds of quantitative easing have led to higher priced commodities.

Whether you realize it or not, QE3 - same as the stimulus programs before it - is adding greatly to the costs of everyday life. QE3 is directly leading to higher prices for oil, food and the cost of imported goods.

Over time, that results in a tremendous consumer expense in all product and service categories.

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When it Comes to QE3, Ben Should Have Tried the Helicopter

At last Thursday's Fed meeting, Ben Bernanke finally played his last card.

With an open-ended promise to buy $40 billion a month in agency-guaranteed mortgage bonds, the Fed Chief turned QE3 into a much larger gift called "QE Infinity."

But the truth is he would have been better off if he had tried the helicopter.

For those who forget the reference, Ben's first foray into national fame came in November 2002, when he delivered his famous "helicopter speech" at the National Economists Club in a Washington, DC Chinese restaurant.

Little did I know that day that I was about to witness history as Bernanke said the risk of deflation was so great that the Fed should drop interest rates to zero and consider using further measures -- such as dropping $100 bills from helicopters -- to "stimulate" the economy.

Of course, I blotted my Fed copybook for the next decade by asking a snotty question since I objected to his central premise that the risk of deflation was either imminent or would be disastrous when it happened.

The idea that deflation was imminent at the time was simply ridiculous. Consumer price inflation, on official BLS statistics which consistently understate it by about 1%, was 2.5% in 2002, 2.0% in 2003 and 3.3% in 2004.

Even then, Bernanke's economics weren't that well connected with reality.

The Problem with QE1...QE2...QE3 and QE Forever

The reality today is that it just doesn't work.

Bernanke's various "quantitative easing" policies have benefited primarily Wall Street; the mechanism by which they have fed through to the real economy is at best very indirect.

Currently for example, the Fed is now set to buy a total of $85 billion a month in long-term bonds, through the new mortgage bond purchases as well as the remains of his "Operation Twist" strategy.

This is supposed to lower interest rates, which in turn is supposed to support the housing market and produce jobs.

However the principal effect of all this Fed activity is to support stock prices, commodity prices and other asset prices. That's why gold prices went on a tear after QE3 was announced, while interest rates have actually risen.

Traders have seen the limit of what the Fed can do to support the bond market and have begun to wonder whether the Fed's activities will bring inflation. The question is what will happen to the bond market once Fed purchases slow. If the Fed's efforts burst the bond bubble, $85 billion a month is nowhere near enough to begin to reflate it.

Meanwhile, in the real economy-the one where you and I live-- not much changes.

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Jim Rogers On QE3, Gold, Silver and Oil

The U.S. Federal Reserve is ready to launch a third round of quantitative easing, dubbed QE3 or QE Forever - but legendary investor Jim Rogers is shaking his head.

In fact, Rogers said repeating the same program the Fed has already attempted will make policymakers "look like fools again."

In an interview with CNBC before the Fed's announcement, the chairman of Rogers Holdings said he was skeptical that additional stimulus measures could have any meaningful effect on the U.S. economy. He added that despite his reservations, he expected the Fed to unveil QE3.

The iconic financier also lashed out at the new developments in Europe, including a move from Germany last week to funnel taxpayer cash into the European Central Bank's OMT program, their own version of quantitative easing. Rogers maintained they are not addressing the root of the problems plaguing the Eurozone area.

On Europe's move to implement a euro version of QE, Rogers said it affords the Western world "unanimity towards mutual destruction."

Any relief will be temporary, warned Rogers.

"We're all going to pay a horrible price for this in a year or two or three," he said.

As for why the Fed will continue its ineffective stance of zero to 0.25% interest rates through at least mid-2015, and the tossing good money after bad, Rogers advised the reasons are simple.

It's an election year and "Mr. Bernanke wants to keep his job."

That's why Rogers is getting defensive with commodities.

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What QE3 Means for Markets and the U.S. Economy

We finally know that a third round of quantitative easing, or QE3, is here, but it has left investors asking what it means long-term for the markets and the economy.

First, let's look at what QE3 is meant to do.

QE3 is meant to encourage economic growth and improve the U.S. employment picture.

On Sept. 7, the Department of Labor reported that only 96,000 jobs were created in August. Not only was that far below expectations, it was well under the 141,000 increase from July.

In addition, the underlying foundation is even weaker as income is down and more Americans are leaving the labor force. Of the jobs that are being created, most are poorly paying ones in the service sector.

From that, economic growth for the United States slowed to 1.7% in the second quarter, down from 4.1% in the final three months of last year.

This new QE3 - or QE Forever, since it has no expiration date - is the most intense program initiated by the Fed to goose the economy since the crisis.

Noted Julia Coronado, the head economist for North America at BNP Paribas and former Fed economist, "This is definitely a significant shift in FOMC policy. This is a very aggressive commitment to success on its mandates."

Here's what QE3 means for the markets and the U.S. economy.

Read More…

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