It’s happening people, QE-3 has been implemented by the Federal Reserve Bank. Earlier yesterday, the central bank announced that they will continue their Operation Twist’ program into the end of the year. They will also keep the fed funds rate (overnight lending rate to the large banks) at zero percent until mid-2015. The real bazooka was when they said that they will buy $40 billion worth of mortgage back securities every month. Finally, to put the icing on the cake, the central bank also said that they will add to purchases if the labor market does not improve. It sounds like they want to create another housing bubble the way they did in 2002 – 2006. In any case, the stock markets have rallied sharply higher on the news.
There are massive stimulus programs now taking place in the United States, Europe, and China. The world’s largest central banks are inflating markets on unprecedented levels. Traders and investors must remember, for every action there is an equal and opposite reaction. The last time this type of inflation was created the markets faced the worst recession since the Great Depression. The next one could be similar or even worse should this easy money continue. While a disaster may not occur for quite a long time, the equal or opposite reaction will likely happen at some point down the road if history serves us correctly.
What happened yesterday? Well, yesterday President Obama was basically reassured to win reelection. Remember, higher stock market prices often mean that the incumbent will be reelected. The only negative that could hurt President Obama at this time is the high fuel and food prices that will come from all of this stimulus.
Leading equities such as the SPDR Dow Jones Industrial Average ETF (NYSEARCA:DIA), SPDR Gold Trust (ETF) (NYSEARCA:GLD), iShares Russell 2000 Index (ETF) (NYSEARCA:IWM), and almost everything else was soaring higher yesterday. While this stock market is severely overbought it has not seen this much stimulus since early 2009.