Quantitative Easing 2
Watching the national evening news last week I can remember the anchor explaining how the Fed was initiating "Quantitative Easing 2, a buyback program of $600 billion treasuries & bonds to help stimulate the economy". Allow me to rephrase the news anchor in more direct language : "Quantitative Easing 2, a Fed program to create/print $600 billion to purchase treasuries in an attempt to make credit cheaper; the $600 billion will be the responsibility of the tax payer and the effects of the program could devalue the dollar and set '70s style inflation on commodities."
So what exactly is Quantitative Easing 2, and when was Quantitative Easing 1?
The original Quantitative Easing 1 was originally called 'The Stimulus Package', no politician in their right mind would support something called 'Stimulus Package 2', so they gave it a smart sounding name: 'Quantitative Easing 2' (much more voter friendly).
The original Stimulus Package was originally proposed to be $600 billion to purchase assets in Nov '08 and quickly rose to $1.7 trillion by March '09 to purchase primarily treasuries and mortgage backed securities. Makes you wonder how much QE2 will actually cost in the end.
The plan for QE2 is to purchase $600 billion (same as QE1) in long term treasuries to drive down already historically low interest rates to help homeowners refinance and small businesses get loans. The reality is homeowners and small businesses don't necessarily need cheaper credit, they just need credit. The banks already have plenty of capital and need to begin the process of smart lending to borrowers to fix the problem. Meanwhile, many qualified borrowers are waiting on the sideline, unable to get financing because of beaurocratic lending practices by the banks.
The Fed's plan to finance QE2 is really simple, print new money! Well, it's unlikely they'll actually print the money, it will probably work more like this:
In the past, the government sold treasuries to banks, got paid for these treasuries and then spent that money on government programs (military, roads, entitlement programs, etc). Then, the government implements QE2 and buys back these treasuries from to the bank and pay them with a government check backed by money that never existed before (I wish I could do that!) And that's how you create money without running the printing press.
So what are the possible effects of QE2:
Most of the money will likely go to large Investment Banks, especially Bond Traders, who will supposedly lend this money out, make investments pushing the stock market higher and increase property values and exports by injecting a little bit of inflation. The other more certain effect is devaluing the US dollar. With a dollar in a downward spiral, inflation becomes the real concern. If inflation 'over shoots' the Fed accepted 1.25% to 2.0% inflationary rate, we could see huge moves up in commodity prices such as oil, food and especially gold (remember the late '70's).
So what's my QE2 trade?
I will be considering the following: Long commodities (especially gold), short the USD and in short term (next 6 months) being long equities (This is not a recommendation to buy or sell). Regardless of whether QE2 works or not in the long term, these markets should respond accordingly.
Happy Trading,
DollarBart
