Fed Adds More Stimulus. Why This Matters to You

QE1 and QE2 may have been great ships, but it will be written of this economic crisis that those terms referred to Federal Reserve policies that created cheap money in unprecedented ways. QE2 ended this past June with mixed reviews, but now headlines abroad and confidence eroding measures mostly created by politicians here have contributed to a softening in the economy. The Fed has observed that no other branch of government seems able to make a positive contribution to the economy's dilemma at this time, and felt they had to follow on with a new program.

The Fed announced today a program to push down long term interest rates even further than the near record lows they are today. Look forward to a chance to refinance your mortgage and maybe other debts once again in the future.

Reason I it is important to you:

Are 2.5% 15 year mortgages a possibility? In this era of amazing events and unheard of numbers, probably.

Reason II:

America and Its Political Leaders Have to Fix the Economy From Here

This really marks about the limit of the Fed's abilities to substantially help the economy. The President and Congress control spending, taxes and policies that govern the economy. It is time to expect them to understand the problem and fix it.

Unfortunately, partisan slogans don't add up to substance and that is what is needed. This is going to take a while and in the meantime the USA is going to be held hostage, so to speak, by the political class who have shown themselves adept at only one thing. Getting Elected.

The Political Debate about Spending or Not Spending is Wasting Time.

Six Issues Only Congress and the President Can Fix.

-Health Care Costs in the US are about $1 Trillion higher than they should be killing job growth and public sector budgets.
-China has conspired and largely succeeded in stealing our industrial base and accumulating our wealth       through unfair trade. Thanks for the incompetence Federal trade regulators and Congress.
- Tax policies have to be simplified and streamlined, closing loopholes, while tax breaks for the very wealthy have to be justified in terms of the national interest or closed now.
-Stock and Capital market activities have to be regulated so they benefit the small investor first the formation of capital for productive investment. Amazing how influence money has warped this issue.
- Public education in the US is the most highly funded in the world. The outcomes for that investment is pretty miserable with kids leaving high school with inadequate skills to find a job outside of retail services. Trade schools, discipline, expectations, behavior contracts, school uniforms, teacher merit evaluations and most of all parent accountability are going to have to be put in place.
- A new energy infrastructure will lower our fuel consumption, increase domestic production, create jobs and lower imports. Extremists and political cronies of the left and right, should be shown the door from policy making.

The US can do these things and would thrive if it did. Bernanke can't do it for us though, we have to demand it of our political leadership.

On the gas!

The stock market has attained a level of price with respect to 2010 earnings that is fairly close to past market levels. So is the profit opportunity already realized?

I don't think so because if you are looking for a place for money that needs a return, try to build a shorter term ladder these days. Available interest rates on the one year tranche are less than 1% if you are credit risk averse.

Money is flowing into the financial system generally as well. Try to refinance residential real estate. Is it virtually impossible as some reports have made is seem? No credit standards are just sensible like they used to be and loans are being readily made. What is different is rates and the ability to lever up. 4.25% on a 15 year mortgage is cheap and available. Is there a reinvestment opportunity for some in this setup? Yes very much so and it is going on now.

With realistic loan underwriting and cheap money, we have a potential for a sustainable healing to take place in the economy even as the direction of the business cycle points up. Given the improving trend and flows of cheap capital, I think it is hard to see how one can be bearish despite the bad news and debt issues. Most importantly the low interest return on fixed income is encouraging to flow towards assets with much higher potential returns and risks.

While this has caused stocks to rebound, and some in particular still look very good, it has most of all resulted in investment money flowing towards commodities.

Some commodities like oil are strong despite having no current shortage whatsoever, yet a strong case can be made there will be. Gold on the other hand, is migrating to a role it used have. Arguably gold is now primarily a store of value or in other words a currency in of itself. What price is that worth? You don't know? How can anyone?

It has been proposed that gold will become a currency of exchange in an electronic medium. If you have used Pay Pal you see the beginning of the idea. Instead of dollars in a Pay Pal account, what if there were gold credits? What if I sold you a laptop for 1/2 an ounce of gold on your gold Pay Pal account. Would that be too far out to imagine? No not all.

So cheap interest rates are the gas and where it all goes isn't within the control of those who apply the gas. Home prices or financial asset prices will benefit collaterally, but the charts show gold at new all time highs almost everyday now. The gas is flowing and where it goes seems to be the most salient investment news of all.