Jeff Miller | Oct 03, 2012 07:54AM ET
The analysis of current Fed policy has included the usual parade of mistaken pundits.
There is a legitimate debate about QE3, but it has been obscured by those with an agenda based upon their politics or their business models.
The result is an exceptional opportunity for the long-term investor.
Mistakes
Here are the four biggest mistakes:
And here are the correct answers, pretty obvious to anyone with any training in economics:
In a model-driven assessment based on the past impact of QE1 and QE2, Deutsche Bank Securities chief economist Peter Hooper says this is what the Federal Reserve printing another $800 billion — slightly less than the gross domestic product of Australia — will do:
1. Reduce the 10-year Treasury yield by 51 bps
2. Raise the level of real GDP by 0.64%
3. Lower the unemployment rate by 0.32 percentage points
4. Increase house prices by 1.82%
5. Boost the S&P 500 by 3.06%, and
6. Raise inflation expectations by 0.25%
I am disappointed that the writer diminished his helpfulness by skewing in such a skeptical direction about these findings, falling into the basic current trap of catering to his audience.
The Deutsche Bank conclusion is correct. The general direction and order of magnitude of these effects makes sense given past QE policies.
A Deeper Look
In fact, I expect the current QE round to be more effective than the past versions. Why? The focus on changing expectations.
In the past, any good economic news was greeted with the notion that the Fed would step back. The current policy changes this. The Fed is committed to economic stimulation, even if it pushes inflation somewhat above the 2% target level.
For those who don't like the the Fed inflation measurement methods, you can just multiply by ten or apply whatever other silly adjustment you think is right. Meanwhile -- learn to live with it! This is the new policy.
Investment Implications
The basic conclusion is that the business cycle is going to be extended significantly. We are in the third inning or so. It is a good time for tech stocks and deep cyclicals. (I like and own Caterpillar (CAT), Illinois Tool Works (ITW), Apple (AAPL), Oracle (ORCL) and Intel (INTC)).
Financial stocks will enjoy a nice yield spread. Europe will be helped. (Think Goldman Sachs (GS), JP Morgan Chase (JPM), AFLAC (AFL)).
The timing is a bit different from past QEs. Since everyone is busy misinterpreting the policy, bashing the Fed, and politicizing the decision, the immediate market impact has been muted.
This time the real test will come via the actual economy, not the speculative commodity buying of the those with a simplistic view of Fed policy. The upside catalyst will come when we see some stronger economic reports, as we did with yesterday's ISM numbers.
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