QE2's Days Could be Numbered

By Josh Lipton The good ship QE2 has only just set sail but already some are forecasting an early return to economic harbor. Last week, the Federal Reserve announced that it would print another $600 billion to buy Treasuries through mid-2011, a maneuver known as the second round of quantitative easing or QE2. The first round involved roughly $2 trillion it printed to buy Treasuries and mortgage debt during the financial crisis.

(To read David Banister's article on how to play gold right, click here.) The point of the program is to keep long term interest rates low, encouraging borrowing and spending by consumers and companies. The idea, if Bernanke and his FOMC allies are right, is that yields will tumble and people will start buying homes again. Expecting greater inflation ahead, they'll also buy more stuff at the mall. In turn, companies can start hiring and unemployment will fall. However, there has been deep skepticism about the program in the canyons of lower Manhattan where many economists worry that all this money printing will weaken the dollar and spark inflation which, once unleashed, will prove difficult to control.

(To see Nadeem Walayat's piece on why buying uranium is like buying gold in 2001, click here.) Put it this way: Besides Barton Biggs of Traxis Partners, can you name another major fund manager who supports this policy? Even close allies of Bernanke appear hesitant. Fed Governor Kevin Warsh, for instance, voted for the Fed's program, but said he is less optimistic than some that additional purchases would have “significant, durable benefits for the real economy.” Still, while many investors might be worried about the unintended consequences of all this monetary experimentation, a lot of them probably appreciate what the program has recently done for their portfolios. We might not know whether quantitative easing can address serious structural economic problems, but we sure do have proof that it can provide a quick sugar high to investment markets.

(To view Kevin Depew's thoughts on China downgrading US Credit rating, click here

Since August 27, when Bernanke suggested that more monetary easing was on the way, the SPDR S&P 500 ETF SPY, which includes holdings like Exxon XOM, Apple AAPL, Microsoft MSFT, IBM IBM, and Bank of America BAC is up 14.3%. However, just a few trading sessions after the Fed announced the launch of QE2, strategists are already arguing that this program's days may be numbered. Stock prices might correct, say these market pros, as the Fed is forced to scale back the stimulus due to stronger-than-expected economic data, the global backlash against QE2, or new voting members of the FOMC who stand very much opposed to this monetary stimulus.

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