QE3 ANNOUNCED BY FED TO PRINT $480 BILLION!!!

Fed to Print $480 BILLION AGAIN!!!

Yesterday, Fed chief Ben Bernanke proved that what many have suspected all along is indeed true: The U.S. Federal Reserve will not patently stop printing money!

Mr. Ben Bernanke announced that the Fed is going to do the same old thing, it’s going to hold interest rates near zero as far as the eye can see... And it’s going to print a whopping $40 Billion (Rs.2,21,680 Cr $/Rs.55.42) new dollars per month in an attempt to stimulate the economy — a whopping $480 billion (Rs.26,60,160 Cr $/Rs.55.42) per year! In short, it’s doing the same things it has done since 2008, but expecting better results, In any way you look at this, that’s The Very Definition Of INSANITY!! The Fed has Already held interest rates near zero percent for four long years, now. Plus, it has already created $1.8 trillion out of thin air through QE I and QE II... And it has already bought hundreds of billions of dollars more worth of long-term Treasuries as part of Operation Twist 1 and 2. 

So what’s the result?

NO IMPACT WHATSOEVER ON THE REAL ECONOMY!

Sure — all that free, easy money will temporarily excite the stock markets around the world but despite everything the Fed has done ... the

** Unemployment has stayed over 8 % for 42 straight months ...

** The average family home is Still falling in value ...

** Profits of many major corporations in US are Still sinking ...

** The U.S. economic growth is Still grinding to a near standstill ...

** And now, as America approaches the precipice of its great fiscal cliff, the stock market looks for the entire world as if it’s a massive bubble about to burst!

** Worse is that, the middle class — the very backbone of the U.S. economy — is getting eaten alive:

HOUSEHOLD INCOME IS PLUNGING: The U.S. Census Bureau just reported that real median household income has now fallen for the fourth straight year. Income has fallen so low, in fact, that when you adjust for inflation, the median family has the same income today as it did in 1967 , now that was the 45 long years ago!

THE INCOME GAP IS WIDENING ALARMINGLY: The Census Bureau is also reporting that the movement of income away from the middle class has just hit a record high. That’s terrible as typically this kind of increasing disparity in income occurs just before economic calamities — and today, it’s more extreme even than before the 1929 stock-market crash and the Great Depression!

U.S. POVERTY IS AT ALL-TIME RECORD HIGH LEVELS: Finally, as if to add insult to injury, the Census Bureau also reports that a staggering 46.2 million Americans now live in poverty! And not only isn’t the Fed Helping ... its failed efforts to revive the economy is creating a second crisis: Thanks to the Fed’s past money-printing gambits, the Producer Price Index just jumped 1.7% in August — hands-down the biggest surge in producer price inflation going back to June of 2009!

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Make no mistake:

The U.S. economy is broken.

Nothing the Fed can do will fix it.

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To the contrary: The Fed’s easy money policies Created this crisis by inflating the housing bubble. Now, they’re only making matters worse — doing absolutely Nothing for the job market, while driving inflation higher! And as America’s great Fiscal Cliff approaches — the catastrophe that JPMorgan says will push America “head-first into the fiscal meat grinder” — the storm clouds are darker than ever.

The Gold has raised 111.58 % from QE1 to QE3 : Gold jumped after this QE3 by FED the third round of monetary stimulus called Quantitative Easing. QE has been a massive boon for gold, when FED flooded markets with nearly Zero money or free money, gold’s allure as a store of wealth & an inflation hedge is burnished. Loose monetary policy weakens the dollar boosting the GOLD. Fed’s nearly ZERO interest rate policy and bond purchasing under QE1 kicked off on 16^th December 20008 and Gold was $837.50 an ounce, & today Gold is at $1772 an ounce this means Gold raised to 111.58 % on back of QE1 & QE2 which followed in Nov 2010. So QE & Gold has always been supporting each other..SO ALWAYS BUY GOLD

Impact of QE3 on India: As for India, off course in near term the pattern of QE has always been strong for emerging market like India and for their currencies and even stronger for commodities. The QE programme is good for India for a day or two as it will help the rupee a little bit and at a same time QE surges commodity prices, which is bad for India as it imports most of the commodities to meet its growing needs of the economy, Brent crude is at $115 and any raise in its prices will make inflation to climb again making life difficult for RBI, remember QE2 which was announced on Nov 04 2010 in which Indian Market made a high of 6338 on NOV 05 2010 and had a one way decline post that & so QE2 turned out to be disastrous for India as it stoked inflation. India is not a obvious QE play now, as Indian markets has its own set of problems like high inflation, policy paralysis and of course the scams and political unrest. The diesel price hike of Rs.5/liter is the positive step and so the FDI policy in aviation but these have a short term sentiments..

In short, US FED with the announcement of QE3 gives the clear message to the market that rates will remain this low till 2015 with a hope that this low rates will revive economic growth, but on India one should remain cautiously Bullish, one must look at classic defensive's like pharma, consumer stocks with a risk of breakdown between the investment cycle & the consumer cycle weighs heavily on them.  

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QE2 coming to an end and QE3 could follow!!!

As told on blog on QE earlier, by JUNE 30^th 2011, the Fed will be winding down its second round of quantitative easing. I.e.QE2. By announcing quantitative easing Fed made an impression to the world that they’re willing to do whatever is necessary to maintain growth, which promoted higher stock prices, made people and companies feel a little more financially stable and wealthy, which will then translate into consumer spending & subsequently unemployment will go down. The employment situation do showed some increase in hiring & a drop in the unemployment rate below 9.0 %, all due to QE program. Now when the unemployment rate ticked back up again above that high benchmark of 9.0%, and weekly initial jobless claims have been firmly above 4,00,000 for several weeks, people have started talking about QE3 i.e. third round of quantitative easing !!!

Well, the perception of “easy money” was enough to encourage speculators and traders to make a leveraged bets on both stocks & commodities. As said, stocks and commodities went higher. And the jobs data improved a little bit all due to blessing of QE2.

Now, when the QE2 is coming to an end, the perception of 2011 recovery has evaporated as the economic data from mid-summer signaled another round of recession coming back. At the opening of the year, many economists were projecting U.S. to grow as high as 5 %; the Fed was thinking 3.4 % to 3.9 % of growth which was above average year of economic expansion.

The U.S. has grown at a historical average of 3 % per year. Even with unprecedented stimulus it’s been growing below the trend since 2006. Recent data suggests that another round of recession is coming …A recent study showed that since 1948 whenever the US GDP fell below 2 %, it normally predicted recession for the U.S. economy.

In April 2011, the Bureau of Economic Analysis (BEA) gave their advanced estimate for Q1 2011 which said that growth will be at 1.8 %, Unemployment will hover around 5 % higher than pre-crisis levels.

Even after the two rounds of quantitative easing by the Fed and two rounds of fiscal stimulus by the U.S. government, employment will still sits about 5 % over the long run “natural rate” of unemployment, housing prices will remain anywhere from 20 % to 50 % below its peak levels. The government has recapitalized the banks, the Fed has kept mortgage rates historically low, and various failed mortgage revival programs have been floated, housing is still at 32 % down from 2006 highs.

As all can see that consumer credit peaked in 2008 when Lehman Brothers failed, it likely means that the world is in for another seven years of economic uneasiness.

In Asia, traders have been anticipating QE3, sending the Indian rupee, Singapore dollar, Malaysian ringgit, Indonesian rupiah & even Thai bhat went higher, QE3 could turn into massive capital inflows in Emerging markets like India boosting growth, creating an illusion of false recovery, but in reality they would be just bubbles. If QE3 is not announced then in that case US markets can collapse by 10 % or so making treasury yields to rise, USD would strengthen and commodities like Gold, Silver & Oil would see a minor dip in their prices.  And if QE3 happens it will make US $ to crash. US $ will loose its value among all major currencies across the world , crude oil prices will jump up, prices of commodities like Gold will shot up, Equity markets around the world especially Emerging markets will rise and India will be benefited by it if India’s own internal problems are solved by that time.

With all of this in mind, even though the easy money policies of the Fed have been highly scrutinized, in my view Fed may delay the announcement of QE3 which can cause markets to take a down turn for a while and on announcement of QE3 markets will raise again. There are lots of issues around the Indian equity markets such as high inflation, 2G scam, Government facing public agitation on corruption, such issues were keeping investors away form our markets for a while, but on announcement of QE3 our markets will raise again, I believe that stocks specific investments during the down turn would bring good returns, in the mean time I would be going for 45 % in stocks & 25 % in Gold & rest to hold cash, this would be my strategy for the time being.

But one thing of sure QE3 would bring another violent downturn for the global economy!!!!!

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