As 2012 began, a friend and I had a discussion of what would come first, a 4G iPhone or DOW 14K again. We both concluded the iPhone, without hesitation, but this Summer rally sure has made it interesting. Apple announced the phone on Wednesday, much to consumer and shareholder enthusiasm. Thursday the Fed sent the DOW flying high with the news of QE3. Everyone knew it was coming, but what the Fed announced was even more aggressive than the Market expected. Global indexes soared, led by Commodities, Materials and Energy, but it was broad based and it was higher. Crude oil is pushing $100 again. Gold is nearing $1800 again. This 3rd round of Quantitative Easing is designed to increase spending, but it is having an immediate impact on inflation. We’re already seeing it in food and gas prices.
Federal Reserve Chairman Ben Bernanke rationalized the aggressive move sighting high unemployment and a sluggish US economy. Bernanke pledged to purchase $40 Billion of mortgage-backed securities per month (per month!) until the labor market improves. That means that QE3 is open-ended, and we can expect the Fed to be active for another year at least. Importantly, Chairman Bernanke’s 2nd term ends in 2014. He will no doubt leave a lasting legacy.
Throughout this recovery, which began in 2008, governments around the globe have maintained a coordinated monetary line of defense to help stimulate economic activity and prevent another global recession. From China to Brazil to Germany, and everywhere in between, Central Banks have been busy pumping money into the financial system to keep it liquid. For perspective, this week’s Fed announcement was the 262nd Central Bank initiative in 13 months. Europe’s Central Bank has been busy too of late.
With all of the stimulus and intervention, the Global Markets right now sort of remind us of Major League Baseball a couple of decades ago. Central Banks have provided substantial performance enhancing substances to the system, and stocks have soared like baseballs in the Summer of ’98. The gains are real, and it sure looks good. But we know all too well how quickly gains can be taken away. We’re on it.
Have a nice weekend.
By: Mike Frazier