Greed & Fear Comments on Fed

• The Fed’s action probably tilts the presidential polls further in favour of the incumbent by making it less likely that the stock market collapses in the run up to November. Remember a weak dollar is good for the S&P500. 

• Fed buying of US$40bn of mortgage-backed securities a month means it will take about three years for the Fed to achieve a similar scale of Fed balance sheet expansion as was added in QE1. Still when Operation Twist ends as scheduled on 31 December, it is not beyond the bounds of possibility that Bernanke opts to resume outright purchases of Treasury bonds again.

•  The aggressive Fed easing clearly has potential negative inflationary social consequences for Asia, because it raises the risk of a renewed surge in food prices as well as a new surge of asset inflation.

• Sep. 04’s mortgage tightening action in Hong Kong is a reminder that gold is now a far better hedge against Western monetary expansion than Asian physical property. In Asia prudential policymakers are trying their best to prevent asset bubbles, while the Fed seems increasingly desperate to re-create one.

• Investors should continue to watch Spanish bond yields as the most likely signal for renewed Eurozone tremors. The Eurozone’s growth prospects will not have been helped by the recent rally in the euro courtesy of Ben Bernanke. The relative ugly contest between the US dollar and the euro has now become a nightmare to call.

• The improvement in the sovereign credit has been reflected in a spectacular collapse in both US dollar and peso sovereign bond yields in recent years. The dramatic decline in bond yields is putting pressure on the local asset management and pension fund industries to shift more into equities.