The US Federal Reserve stunned financial markets yesterday by deciding not to begin to wind up its $85 billion a month money printing program QE3. The dollar lost one per cent against a basket of major currencies, bond yields fell and gold shot up $60.
As ArabianMoney has been pointing out for the past week the US housing recovery has already been killed over the summer by the rise in interest rates that followed the merest hint of an end to QE3 back in May. The Fed is not blind, and it will know in advance some of the US economic data about to be published. It must be particularly awful.
US housing dead
The US housing recovery has not just stalled but gone back into reverse. Industrial orders will be falling because of the deteriorating global macroeconomic environment with Europe now in a deep recession, China also in recession whatever its inflated GDP numbers say and Japan poised to be the first to commit suicide by money printing. Something out there has scared the Fed into switching course. In every recent statement Ben Bernanke has indicated that the Fed will closely monitor economic data. This can be the only reason for its sudden policy reversal. What does this mean for financial markets?
Short term this is a boost for emerging markets that have been hard hit by dollar tightening though this relief may only be temporary. It’s certainly great news for precious metals which will not now retest their lows and will be more in demand than ever as a hedge against the long term madness of printing money.
Dollar negative
The US dollar will most likely fall further. That’s an attempt to export the problems of the US economy abroad and it will not help the global economic recovery one iota. US stocks rose modestly on the news of the Fed’s decision to do nothing to change QE3. However, if the damage already done to the US economy by higher interest rates over the summer is as bad as we suspect then shares are simply far too highly valued for the profit outlook and they will fall and fall hard. Investment classes are going to a very dark place with only a few winners like oil, gold and silver as in the late 1970s in very similar circumstances.
If you want to know more about how best to invest in this difficult environment then our sister publication the ArabianMoney investment newsletter has many actionable ideas that we cannot present on this free website.
Source: arabianmoney
Source:Bullion Bulletin