Federal Reserve Pledges Low Rates Till Kingdom Come; What It Means For Investors? (EWU, GLD, UUP, UDN, GS)

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January 29, 2012 6:51pm NYSE:EWU NYSE:UDN

Mike  Larson: Last week, I discussed how the European Central Bank has lost its marbles, launching its own version of quantitative easing. I dubbed it “QE-E.”

I also said that QE accomplishes almost nothing for the “real” economy, even if it juices asset markets. And sure enough, we got more proof of that this week (details to follow!).

Well, this week it was the Federal Reserve’s turn at the podium and what happened? Policymakers didn’t launch an official QE3 program. But they did promise to keep short-term interest rates low through late 2014 … up from a previous pledge of 2013.

Not only that, the Fed also said it would continue with its “Operation Twist” policy of selling shorter-term Treasuries and buying longer-term ones. The goal? Hold down long-term interest rates.

Noted bond fund manager Bill Gross of Pimco dubbed it “QE2.5.” All I could do was shake my head!

What QE Does —and Doesn’t — Do!

If all this QE talk has you confused, I understand. Wall Street jargon can be a bear to decipher. So let’s just keep things simple and explain what QE is: Money printing by a country’s central bank. And what does that money printing do? [Related: U.S. Dollar Bullish ETF (NYSEArca:UUP), U.S. Dollar Bearish ETF (NYSEArca:UDN)]

Pumping  more cash into the economy soon leads to higher prices for everyday items.
Pumping more cash into the economy soon leads to higher prices for everyday items.

It devalues the currency of the country doing the printing …

It erodes the purchasing power of the country’s citizens …

It inflates the price of commodities, making every gallon of gas you buy and many of the groceries you purchase more expensive …

It drives down the yield on virtually all of your savings vehicles, forcing you to scrounge for pennies in your couch cushions or take on huge risks to generate the same amount of income you made previously …

And it artificially boosts the value of paper assets, including everything from junky bonds to stocks.

In other words, if you’re an average American, you get screwed!

But if you’re a seven-figure-salary investment banker at Goldman Sachs (NYSE:GS), you hit paydirt. You can peddle more stocks and bonds, make a lot of money doing so, and maybe afford a new Ferrari or house in the Hamptons.

Ain’t life grand?

The fatal flaw of QE, though, at least in terms of its impact on the REAL economy, is those pesky side effects. Sure, QE temporarily juices stock prices. But because it also drives up the cost of living, it drives down the disposable income of everyday citizens. Eventually prices rise so high that no one can afford them, and that’s when the economy collapses.

And even during that “honeymoon” period when stocks rise, QE doesn’t really help the economy …

The latest example came just this week from the U.K. The Bank of England bought 200 billion pounds of assets there as part of its QE1 program a while back. Then it launched a 75 billion pound QE2 program in October.

What happened as a result? The country’s economy shrank a greater-than-expected 0.2 percent in the fourth quarter of 2011. That puts the U.K. (NYSEArca:EWU) on the verge of a double-dip recession. Oops!

What to Do …

Last week, I talked about the potential for QE-E to prop up the asset markets regardless of the fundamentals. Now we have the Fed piling on with its own version of “QE 2.5.”

Never mind that it won’t work, at least if by “work,” you mean help the real economy. Fed policymakers like Ben Bernanke aren’t going to let the facts get in the way of a good story. They need to look like they’re not just sitting on their hands. So they’re going to keep doing the same wrong things, expecting a different result.

The best way to protect yourself is to own some gold (NYSEArca:GLD), own select fixed income investments that do NOT pose excessive risk, and own select stocks with solid fundamentals. That’s what I’ve been recommending to my Safe Money subscribers.

They should be in a good position if the weak global economy persists, and they’ll get an extra boost from all the easy money sloshing out there. To see how you can join them and receive specific guidance on “what,” “when,” and “how” to buy, click here.

But if you choose to go it alone, just be sure to keep one eye on the exit doors — because down the road, QE 2.5, QE-E, and all these other harebrained programs will fail just like their predecessors did!

Until next time,

Written By Mike Larson From Money And Markets

Money and Markets (MaM)is published by Weiss Research, Inc. and written by Martin D. Weiss along with Nilus Mattive, Claus Vogt, Ron Rowland, Michael Larson and Bryan Rich. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaMare based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical in as much as we do not track the actual prices investors pay or receive. Regular contributors and staff include Andrea Baumwald, John Burke, Marci Campbell, Selene Ceballo, Amber Dakar, Maryellen Murphy, Jennifer Newman-Amos, Adam Shafer, Julie Trudeau, Jill Umiker, Leslie Underwood and Michelle Zausnig.

This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com/.

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