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Notes to myself, possibly of interest to others.
-- Bill Northlich

Monday, September 24, 2012

Rosenberg on QE3 investing

[W]hen one considers reinvested coupons, the Fed will be in there buying $65 billion of mortgages-backed securities per month going forward which means that within 20 months it will end up having more MBS on its balance sheet than Treasury securities. This in turn should be supportive of high-grade and even some high-yield debt as investors are compelled to replace the income product that the Fed is taking out of the marketplace (Emerging Market debt as well). The allure of income equity should also be enhanced in this new and extremely aggressive phase of monetary policy stimulus.

That the Fed chose to announce at a time when the US dollar was breaking down, gold testing its highs and market-based inflation expectations surging to the high end of the range suggests that the Fed is going to tolerate a higher inflation rate in the future, or that it wants to reflate our way out of our debts — and as such inflation-hedges like real estate (location dependant). commodities (though China‘s slowdown is a near-term hurdle) and TIPS (real return bonds) deserve some attention as well. REITS may appear expensive for value investors but they represent a nice balance between a ‘hard asset and a "yield" play. Ditto for income-producing infrastructure themes. With the Fed effectively removing a substantial amount of interest rate volatility from the market place, spread product should also remain an effective strategy in delivering risk-adjusted returns.

Be that as it may, exposure to economic sensitivity should be handled with great
care as Fed policy is still colliding with consumer frugality, government austerity and corporate liquidity-preference — roadblocks that should not be underestimated.

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