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The Fed Will Not Be Outdone

So now the US Federal Reserve has followed the ECB’s lead and pushed forward their own third stimulus program, and this time it is a multi-pronged, indefinite time frame approach.

This time, the Fed is going to be buying mortgage backed securities (hear that? a cookie for the first person that figures out what the next safe asset class is…) to the tune of $40 billion a month. That’s a hell of a tailwind.

They also plan to continue to extend their Operation Twist program, where the Fed exchanges their short-term bonds for longer term bonds at the same rate of interest.

And wait kids! There’s more! This time they put no upper limit on the amount that could be spent on this program

However, this is not a cure-all panacea. The US dollar is quite likely to experience even more weakness in the short term due to the fact that this requires the printing of a pile ($40 billion a month minimum) of new money, and as such will work to push down the USD versus other currencies. So look for a lot of strength in currencies other than the USD and EUR (and currencies linked to them)

And gold. Don’t forget the gold. When the US Fed and ECB have committed themselves to turning on the printing presses indefinitely, and the Chinese Yuan pegged to the dollar (meaning they have to start printing, too), well there’s going to be a hell of a lot of inflation fear out there for the next little while, and that is exactly what gold prices thrive upon. Of course there is more to inflation than simply the expansion of the money supply (which isn’t actually expanding that much, we are still in a deleveraging phase), but it’s the fear that counts.

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