To inflate or not to inflate, that is the question.

To inflate or not to inflate, that is the question.

To inflate or not to inflate, that is the question. 421 298 AMA Team

Pearl_TowerGood day. And a happy Wednesday! Nice to see that the cooler temperatures have arrived in Shanghai – it made Sunday softball much more enjoyable, despite losing twice. Getting to last week’s financial issues….
On Wednesday, the FOMC minutes revealed that unless the US economy embarks on a sustainable recovery, America’s central bank will soon unleash additional stimulus. This development should come as no surprise to our readers and with the US CPI (Consumer Price Index) hovering around 1.4% per annum, we believe the stage is now set for QE3. Remember, the Federal Reserve unleashed QE2 when the US CPI had briefly dipped below 1.5% per annum, so the low inflationary pressures at present almost certainly guarantee another round of ‘stimulus’.
Although we do not possess a crystal ball, we are of the view that Mr. Bernanke may clarify his position at Jackson Hole and the QE3 could be officially initiated at the next FOMC meeting. After all, the official unemployment rate in the US is still over 8% and economic activity is moderating. Thus, Mr. Bernanke & Co will probably act soon and commence another round of asset-purchases. This time around, instead of buying US Treasuries, the Federal Reserve may opt for purchasing mortgage backed securities as this will further assist America’s housing market. We believe that QE3 will be bullish for anything that does well in a higher inflationary environment such as precious metals, TIPS (Treasury Inflation Protected Securities) and to some degree stocks. Though the jury is still out as to whether or not quantitative easing has any affect at all on the broader economy.
Turning to Wall Street, it is noteworthy that major US indices are trading around their recovery highs and this just proves that when it comes to investing, monetary policy trumps everything else. Today, short term interest rates in the US are near zero and they are unlikely to go up for at least another 2-3 years.
Housing MarketUnder this scenario, it is hardly surprising that Wall Street has been one the strongest stock markets and this trend is likely to continue for several months.Housing_Market Over in the real economy, America’s housing market is on the mend and housing starts as well as permits have almost doubled from the crash lows. Furthermore, real-estate inventory is coming down and this is a major positive for the world’s largest economy. At this stage, nobody really knows why the homebuilding stocks in the US have rallied sharply, but it is conceivable that they are discounting the imminent recovery in housing.
Central_BankOver in the precious metals arena, the price of gold has now climbed above the 200-day moving average; thereby confirming its new uptrend. On the back of this development, we are in the process of increasing our position in physical gold. If our assessment is correct, precious metals will probably advance until next spring and silver will probably outperform gold by a wide margin. Thus, now seems to be a good time to increase allocation to this sector.
US CurrencyIn the currencies department, it appears as though the yearlong rally in the US Dollar Index is now weakening and a new downtrend will be confirmed when we get a close below the 200-day moving average.
Finally, over in the debt market, US Treasuries have weakened over the past few weeks and QE3 may trigger additional selling in this ‘safe haven’ asset.
For our investors – remember to hold a balanced portfolio and talk with your advisor about any repositioning to take advantage of markets at this time. For more updates on the world financial news please visit our Weekly Global Economic Outlook.
Have a wonderful week ahead everyone!
Co-Head of Portfolio Management,
Bill Longstreet
Austen Morris Associates Wealth Management & Investment Team
www.austenmorris.com

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