Best of the Week
Most Popular
1. Dollargeddon - Gold Price to Soar Above $6,000 - P_Radomski_CFA
2.Is Gold Price On Verge Of A Bottom, See For Yourself - Chris_Vermeulen
3.Dow Stock Market Trend Forecast 2018 - Nadeem_Walayat
4.Gold Price to Plunge Below $1000 - Key Factors for Gold & Silver Investors - P_Radomski_CFA
5.Why The Uranium Price Must Go Up - Richard_Mills
6.Dow Stock Market Trend Forecast 2018 - Video - Nadeem_Walayat
7.Jim Rogers on Gold, Silver, Bitcoin and Blockchain’s “Spectacular Future” - GoldCore
8.More Signs That the Stock Market Will Rally Until 2019 - Troy_Bombardia
9.It's Time for A New Economic Strategy in Turkey - Steve_H_Hanke
10.Fiat Currency Inflation, And Collapse Insurance - Raymond_Matison
Last 7 days
Precious Metals Sector: It’s 2013 All Over Again - 19th Sep 18
US Dollar Head & Shoulders Triggered. What's Next? - 19th Sep 18
Prepare for the Stock Market’s Volatility to Increase - 19th Sep 18
The Beginning of the End of the Dollar - 19th Sep 18
Land Rover Discovery Sport 'Approved Used' Bad Paint Job - Inchcape Chester - 19th Sep 18
Are Technology and FANG Stocks Bottoming? - 18th Sep 18
Predictive Trading Model Suggests Falling Stock Prices During US Elections - 18th Sep 18
Lehman Brothers Financial Collapse - Ten Years Later - 18th Sep 18
Financial Crisis Markets Reality Check Now in Progress - 18th Sep 18
Gold’s Ultimate Confirmation - 18th Sep 18
Omanization: a 20-year Process to Fight Volatile Oil Prices  - 18th Sep 18
Sheffield Best Secondary Schools Rankings and Trend Trajectory for Applications 2018 - 18th Sep 18
Gold / US Dollar Inverse Correlation - 17th Sep 18
The Apple Story - Trump Tariffs Penalize US Multinationals - 17th Sep 18
Wall Street Created Financial Crash Catastrophe Ten Years Later - 17th Sep 18
Trade Wars Are Going To Crash This Stock Market - 17th Sep 18
Why Is Apple Giving This Tiny Stock A $900 Million Opportunity? - 17th Sep 18
Financial Markets Macro/Micro View: Waves and Cycles - 17th Sep 18
Stock Market Bulls Prevail – for Now! - 17th Sep 18
GBPUSD Set to Explode Higher - 17th Sep 18
The China Threat - Global Crisis Hot Spots & Pressure Points - 17th Sep 18 - Jim_Willie_CB
Silver's Relationship with Gold Reaching Historical Extremes - 16th Sep 18
Emerging Markets to Follow and Those to Avoid - 16th Sep 18
Investing - Look at the Facts to Find the Truth - 16th Sep 18
Gold Stocks Forced Capitulation - 15th Sep 18
Hindenburg Omen & Consumer Confidence: More Signs of Stock Market Trouble in 2019 - 15th Sep 18
Trading The Global Future - Bad Consequences - 15th Sep 18
Central Banks Have Gone Rogue, Putting Us All at Risk - 15th Sep 18
Gold Price Seasonal Trend Analysis - 14th Sep 18
Growing Number of Small Businesses Opening – and Closing – In the UK - 14th Sep 18
Gold Price Trend Analysis - Video - 14th Sep 18
Esports Is Exploding—Here’s 3 Best Stocks to Profit From - 13th Sep 18
The Four Steel Men Behind Trump’s Trade War - 13th Sep 18
How Trump Tariffs Could Double America’s Trade Losses - 13th Sep 18
Next Financial Crisis Is Already Here! John Lewis 99% Profits CRASH - Retail Sector Collapse - 13th Sep 18
Trading Cryptocurrencies: To Win, You Must Know Where You're Wrong - 13th Sep 18
Gold, Silver, and USD Index - Three Important “Nothings” - 13th Sep 18
Precious Metals Sector On a Long-term SELL Signal - 13th Sep 18
Does Gambling Regulation Work - A Case Study - 13th Sep 18
The Ritual Burial of the US Constitution - 12th Sep 18
Stock Market Final Probe Higher ... Then the PANIC! - 12th Sep 18
Gold Nuggets And Silver Bullets - 12th Sep 18
Bitcoin Trading - SEC Strikes Again - 12th Sep 18

Market Oracle FREE Newsletter

Trading Any Market

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

© 2005-2018 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