Federal Reserve Chairman, Ben Bernanke, delivered a real blockbuster yesterday in the aftermath of the final Open Market Committee meeting of 2012 – looks like he really wants to end the year with a bang.
Not only will the Fed continue with $40 billion-a-month worth of mortgage-backed securities to supercharge the housing market, it will also conduct an additional $45 billion-a-month of long-term Treasury bonds. The central bank will continue to peg the Federal funds rate at 0%-0.25% until mid 2015.
Most importantly, it will target a specific unemployment rate of 6.5%, 1.2% lower than the last rate, and maintain ultra low rates until then. This is an unprecedented, bold, and historic move. No one can remember the Fed ever targeting employment. The gloves are off.
While QE3 is now only two months old, and financial markets have yet to feel its full impact, it has in effect, launched QE4 right on top of it. Call the duo QE7.
You couldn’t imagine any better Christmas gift for hard assets. Gold (GLD) in particular rallied strong. That’s because QE7 promises to expand the monetary base far faster than the markets had been discounting. There is no better correlation than the one between a growing monetary base and rising prices for the barbarous relic.
The rest of the hard asset space did just as well. Copper (CU) was up, along with silver (SLV), palladium (PALL) , and platinum (PPLT). Oil (USO) saw a healthy $1.50 pop. Combine the Fed action with the possible turnaround in China (FXI) underway, and you could see a sustainable move up in all hard assets, well into next year.
Ben Bernanke’s surprise move also raises the floor under stocks. The robust economic data reports we have witnessed in recent months have been given the juice to continue. When I delivered my webinar this morning, I realized that for the first time in years all of the data points on my “Economy” page were colored green. I suspect we’ll close 2012 with a run at the highs, and possibly climb just short of 1,600 in the (SPX) sometime in Q1.
Treasury bonds (TLT) were a bit of a quandary. You would think that $45 billion a month of fresh buying at the long end would send prices soaring. Instead, prices dropped and yields rose by five basis points. The market seems to be focusing on the longer-term inflationary impact of the Fed move, rather than the quantity of paper the government is willing to soak up. It certainly makes my prediction of a 3% GDP growth rate for Q4 much more realistic. Could this spell the end of the bond market? Only time will tell. Maybe I wasn’t smoking something after all.
Going Out With a Bang