Best of the Week
Most Popular
1. 2019 From A Fourth Turning Perspective - James_Quinn
2.Beware the Young Stocks Bear Market! - Zeal_LLC
3.Safe Havens are Surging. What this Means for Stocks 2019 - Troy_Bombardia
4.Most Popular Financial Markets Analysis of 2018 - Trump and BrExit Chaos Dominate - Nadeem_Walayat
5.January 2019 Financial Markets Analysis and Forecasts - Nadeem_Walayat
6.Silver Price Trend Analysis 2019 - Nadeem_Walayat
7.Why 90% of Traders Lose - Nadeem_Walayat
8.What to do With Your Money in a Stocks Bear Market - Stephen_McBride
9.Stock Market What to Expect in the First 3~5 Months of 2019 - Chris_Vermeulen
10.China, Global Economy has Tipped over: The Surging Dollar and the Rallying Yen - FXCOT
Last 7 days
Gold Bullhorns Quieted for a Day, at Least - 22nd Feb 19
US Auto Loans - Americans Missing Car Payments Is a Symptom of a Much Bigger Problem - 22nd Feb 19
Stock Traders Must Be Cautious Part III - 22nd Feb 19
Stock Traders Must Stay Optimistically Cautious II - 22nd Feb 19
Sheffield FlyPast Footage - "Mi Amigo" US Bomber Crash Memorial Endcliffe Park - 22nd Feb 19
Sheffield "Mi Amigo" Memorial Fly Past , BBC Crew Setting Up Stage for Breakfast TV Endcliffe Park - 21st Feb 19
Stocks Closer to Medium-Term Resistance Level - 21st Feb 19
The Stock Market’s Momentum is Extremely Strong. What’s Next for Stocks - 21st Feb 19
QE Forever: The Fed's Dramatic About-face - 21st Feb 19
Gold Technical Perspective – Why So Bullish? - 21st Feb 19
Sheffield "Mi Amigo" Memorial Fly Past at 8.45am on 22nd Feb 2019 - 20th Feb 19
Here’s The Real Reason You Stress About Money - 20th Feb 19
Five Online Marketing Predictions that will Matter in 2019 - 20th Feb 19
Has Gold Price Reached Upside Resistance Near $1340-1360? - 20th Feb 19
So Many Things are Not Confirming Stock Market Rally - 20th Feb 19
Forex Trading Management: The Importance of Being Prepared - 19th Feb 19
Gold Stocks are Following This Historical Template - 19th Feb 19
Here’s Why The Left’s New Economic Policies Are Just Stupid - 19th Feb 19
Should We Declare Emergency for Gold? - 19th Feb 19
Why Stock Traders Must Stay Optimistically Cautious Going Forward - 19th Feb 19
The Corporate Debt Bubble Is Strikingly Similar to the Subprime Mortgage Bubble - 18th Feb 19
Stacking The Next QE On Top Of A $4 Trillion Fed Floor - 18th Feb 19
Get ready for the Stock Market Breakout Pattern Setup II - 18th Feb 19
It's Blue Skies For The Stock Market As Far As The Eye Can See - 18th Feb 19
Stock Market Correction is Due - 18th Feb 19
Iran's Death Spiral -- 40 Years And Counting - 17 Feb 19
Venezuela's Opposition Is Playing With Fire - 17 Feb 19
Fed Chairman Deceives; Precious Metals Mine Supply Threatened - 17 Feb 19
After 8 Terrific Weeks for Stocks, What’s Next? - 16th Feb 19
My Favorite Real Estate Strategies: Rent to Live, Buy to Rent - 16th Feb 19
Schumer & Sanders Want One Thing: Your Money - 16th Feb 19
What Could Happen When the Stock Markets Correct Next - 16th Feb 19
Bitcoin Your Best Opportunity Outside of Stocks - 16th Feb 19
Olympus TG-5 Tough Camera Under SEA Water Test - 16th Feb 19
"Mi Amigo" Sheffield Bomber Crash Memorial Site Fly-past on 22nd February 2019 VR360 - 16th Feb 19
Plunging Inventories have Zinc Bulls Ready to Run - 15th Feb 19
Gold Stocks Mega Mergers Are Bad for Shareholders - 15th Feb 19
Retail Sales Crash! It’s 2008 All Over Again for Stock Market and Economy! - 15th Feb 19
Is Gold Market 2019 Like 2016? - 15th Feb 19
Virgin Media's Increasingly Unreliable Broadband Service - 15th Feb 19
2019 Starting to Shine But is it a Long Con for Stock Investors? - 15th Feb 19
Gold is on the Verge of a Bull-run and Here's Why - 15th Feb 19

Market Oracle FREE Newsletter

The Real Secret for Successful Trading

New Quantitative Easing Will Launch Emerging Stock Markets Boom

Stock-Markets / Emerging Markets Oct 07, 2010 - 06:34 AM GMT

By: Money_Morning

Stock-Markets

Best Financial Markets Analysis ArticleMartin Hutchinson writes: In Wall Street circles, it's known as "QE2" - for "Quantitative Easing - Round 2."

The U.S. Federal Reserve and the Bank of England (BOE) are moving rapidly towards it, and the Bank of Japan (BOJ) has pledged to enact it.


That Bank of Japan pledge ignited a $23.50 spike in the price of gold on Tuesday. But that's nothing compared to what would happen after a Fed move. An additional easing by the U.S. central bank would cause gold and commodity prices to spike - and emerging-market stock markets to soar.

We should be prepared for this eventuality.

The "Race to the Bottom"
All this talk of "quantitative easing" refers to the printing of money to buy up U.S. Treasuries, mortgage bonds and whatever else needs supporting on the bond markets. The Fed opened the door to it at its last meeting, and there is talk that QE2 will involve bond purchases totaling $1 trillion.

The Bank of England's Monetary Policy Committee is split on the subject - even though Britain's inflation rate is above the BOE's target range. The Bank of Japan on Tuesday reduced its short-term rate to zero and pledged to carry out a $60 billion asset-purchase program.

It's possible the three central banks will pull back from this policy. But it's more likely that they will undertake coordinated action in this direction. Only the European Central Bank (ECB) - dominated by conservative Germans - seems likely to hold out.

Believers in "stimulus" programs in the three affected countries are thrilled that this could play out. In reality, however, it's bad news.

Printing money to buy bonds - primarily government bonds - will tend to fan the inflationary flames. The surge in liquidity will also inflate bubbles - such as the one we're currently seeing in the U.S. junk bond market, which during the first nine months of 2010 saw more issuance than any previous full year.

It will also encourage governments to run even bigger deficits, because they will be easier to finance with the central bank buying bonds. This is not an immediate danger to state solvency in Britain or the United States. But it is a very immediate one in Japan, where government debt is approaching the highest levels that have ever been successfully managed in modern history.

If Japanese policymakers don't like Japan's current economic position, wait till they see the one that would be caused by a default on $10 trillion of Japanese government debt.

The real secret is that the extra monetary stimulus won't do much good in Japan, Britain or the United States because interest rates in all three countries are already very low - indeed, too low for the health of the economies concerned. Indeed, with all three countries printing money, their currencies will likely compete in a "race to the bottom" - with each nation trying to stimulate its domestic economy by being weaker than the others.

It's a pretty dire signal when it's Guido Mantega - the socialist Brazilian minister of finance - who blows the whistle on this impending currency war.

Ode to the Emerging Economies
Although this flood of new money won't find a home domestically, it will find places to settle down in many of the emerging markets.

Emerging markets, by and large, have lots of cheap labor, but lack capital. Because they have only modest domestic savings and are somewhat unstable, interest rates are generally higher than they are in counterpart Western countries. In Brazil, for example, the short-term Selic interest rate is 10.75%, compared to an inflation rate of only about 5%. That means financing expansion is expensive, so growth is slowed.

However if the world's central banks increase the global money supply, the extra money heads for the markets where the best profit opportunities exist. Some of this money will inevitably find its way into domestic junk bonds and leveraged buyouts (LBOs), but most of it quite rationally heads for the higher returns available in the emerging markets.

That's very good news for emerging-market stock markets - at least in the short run, before inflation becomes a real problem - and for two very good reasons.

First, the extra money increases growth rates and incomes, benefiting the earnings of companies selling to domestic consumers. Second, that liquidity infusion pushes up local stock markets, raising Price/Earnings (P/E) ratios. With both earnings and P/E ratios rising, the profit potential is enormous.

Action to Take: If the world's central banks pursue the "QE2" strategy ("Quantitative Easing - Round 2"), then by all means buy some more gold and watch the price rise as investors flee from all the "funny money" sloshing about in the U.S. market.

But don't forget to also increase your allocation to emerging-market stocks - where you'll find the extra money gives you a doubled effect on the growth of your portfolio.

[Editor's Note: If you have any doubts at all about Martin Hutchinson's market call to buy platinum, consider this true story. And keep in mind that gold futures yesterday (Wednesday) settled at their 14th record high in less than a month, thanks to a weaker dollar and the kind of currency "debasement" that will only be exacerbated by a "QE2" move on the part of the U.S. Federal Reserve. Gold finished trading yesterday at $1,347.70.

Three years ago - late October 2007, to be exact - Hutchinson told Money Morning readers to buy gold. At the time, it was trading at less than $770 an ounce. Gold zoomed up to $1,000 an ounce - creating a nice little profit for readers who heeded the columnist's advice.

But Hutchinson wasn't done.

Just a few months later - it's now April 2008 - with gold having dropped back to the $900 level, he reiterated his call. Those who already owned gold should hold on, or buy more, he said. And those who failed to listen to him the first time around should take this opportunity to remedy their oversight, he urged.

We know where gold is trading at today. Those who listened the first time have a 75% return. Even the latecomers have a 50% gain.

More recently, he's urged investors to buy platinum and (as today's essay reiterates) to take a serious look at emerging-market stocks. This documented story about Hutchinson's market calls on gold should give these more-recent predictions a lot of credibility.

But perhaps you don't want just "one" recommendation. Indeed, smart investors will want an ongoing access to Hutchinson's expertise. If that's the case, then The Merchant Banker Alert, Hutchinson's private advisory service, is worth your consideration.

For more information on The Merchant Banker Alert, please click here.]

Source : http://moneymorning.com/2010/10/07/qe2/

Money Morning/The Money Map Report

©2010 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or 72 hours after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules