Last Thursday, the Federal Reserve did exactly what we expected it would: announce QE3. It will “print” $40 billion a month out of thin air and use the funds to buy mortgage backed securities (MBS).
The goal is to reduce the supply of these types of bonds, thereby making them more valuable.
This SHOULD cause their interest rate to go lower, which would theoretically cause the cost of financing a new mortgage to go lower because the borrower would have to pay less interest.
This SUPPOSEDLY will cause more people to buy homes because they pay less interest.
In order for this to be effective it would have to be true that hundreds of thousands – if not millions – of potential home buyers have been holding off buying because interest rates have been too… high.
Yep. For the Fed’s plan to work there has to be a lot of people out there (as recently as last week) saying, “I’m not buying a home yet because, at 3.70%, mortgage rates are just too dang high!”
Do you know anyone like that?
That’s because they don’t exist.
Let me be crystal clear about this: the Fed won’t reach its goal, which is to cause a spike in housing activity that leads to higher home values and more home building, thereby increasing employment.
But it will have an effect… That is, you and I get the pleasure of paying more for stuff.
Gas, food, education, healthcare… all the basics will move up in price as the Fed steals more of our value right out of our pockets. Just brilliant!
The good news is this should be temporary.
For some time we’ve been calling for a spike in the price of gold and other commodities in response to an anticipated QE3.
We’ve got it.
The move higher has been dramatic and, in our view, overdone. That makes now the time to take some chips (or nuggets) off the table as we await the inevitable downdraft in the markets. People WILL realize that the latest round of QE will have the same (lack of) effect as the previous measures.
It is debt deleveraging folks… and slower and lower demand.
No interest rate or bond buying policy is going to change that.
Think about it. When was the last time you looked at what the Fed was doing before you bought a house, a car or an iPad?
P.S. Ultimately, there is ONE force that the Fed is powerless to stop. This one force is driving the slowdown in spending. This one force will lead us straight into the icy grip of deflation.
Ahead of the Curve with Adam O’Dell
What QE3 News Meant for Gold and the U.S. Dollar