Federal Reserve: blowing bubbles
Last time we suggested “deflation looms”, and by August the US Federal Reserve agreed and stated their intention to pump more money into their economy, that is quantitative easing, or what became known as QE2.
Ideally they would push money into the hands of the banks, who would lend it out, oiling the wheels of the economy. But this doesn’t work if the banks don’t want to lend, and businesses and consumers don’t want to borrow - which is where we are.
So with QE2 a key objective is to improve confidence by prodding asset prices higher. As Fed boss Ben Bernanke put it:
“higher share prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits, and that, in a virtuous circle, will support economic expansion”
QED? It is unlikely to be quite so easy, and there will be unintended consequences. The benefit of this largesse is not just felt in the US - the money inevitably flows to where it is felt there is the greatest potential - and in the judgment of many this is emerging markets and commodities.
There is now talk of QE2 inflating bubbles in emerging markets and commodities. Investing to benefit from a bubble can be very profitable providing you are fleet of foot - but first we want to consider if there are any reasons to buy at current prices beyond the short term bubble potential.
Click on the following links to view our commentary on emerging markets and commodities.
(Taken from TopFunds Guide January 2011)