Profit From Quantitative Easing

It’s official: The Federal Reserve has launched it’s second Quantitative Easing program in as many years, better known as QE2. Long story short, the average person, including the typical investor, will be hurt by this campaign. On the other hand, the bold, savvy investor can profit.

QE2 is a complicated affair, but not that difficult to explain. The Fed plans to print $600 billion from November 2, 2010 to July 1, 2011. They will then use that money to buy long-term Treasury securities – essentially, U.S. government debt. The point of all this is to spur the U.S. economy by manipulating interest rates lower and tempting Americans to spend their savings.

If all goes as planned, that means the purchasing power of the U.S. dollar will go down, as will interest rates on things like loans, bonds, CD’s and savings accounts. If the Fed gets what it wants, you will be coerced into spending your money now or investing it in something riskier, rather than saving it for a rainy day. More spending now equals a stronger economy (so they say), and a more robust recovery.

In the meantime though, your dollars will be reduced in value. Even the Fed will admit: QE2’s purpose is to create inflation. Somehow, reducing consumer purchasing power will save our country… it doesn’t make sense to us, either.

And of course, it could all backfire. Federal Reserve polices were the primary drivers of the last two American asset bubbles – technology and housing. And QE2, which is more aggressive and radical than simulative campaign the Fed has ever undertaken, could very likely fuel an even bigger, economy crushing bubble.

The Good News: You Can Profit

Fortunately for us, the Fed is giving us it’s plan before QE2 is in full effect… like a pitcher telling the hitter exactly where and how fast his pitch will be. Here’s how you should swing the bat:

1)Diversify out of the dollar

Most brokers and financial advisors will insist you diversify the holdings of your portfolio among different sectors and securities. They’ll tell you to buy both stocks and bonds, and to spread those purchases around different sectors, like tech, banks, resources and real estate.

But if all of the assets in your portfolio hare held in U.S. dollars, you’re really not diversified at all. It makes a lot of sense, especially these days, to own the currencies of financially stable countries like Canada, Norway, Australia, China or Brazil.

2) Buy hard assets

If the dollar goes down, commodity prices will go higher. So instead of owning pieces of paper issued by the government, why not own commodities that people use… like oil, cotton, corn or gas? There is one ETF available that allows everyday investors to easily gain this kind of exposure: Look up ticker DBC.

3) Forerun the Fed

The Fed has laid out a plan to move investors out of one market and into another. By buying government bonds, the Fed will push yields down and investors will seek higher returns elsewhere. Thus money will flow out of savings accounts and bond funds and into stocks and riskier investments. Namely, we suspect dividend-paying stocks – like Proctor & Gamble – to get a lot of new investor attention. They are traditionally less risky and, like a savings account, pay an annual interest rate. This class of stocks bares the closest resemblance to bonds and will be the most likely beneficiary of QE2.

Lucky for you, these three themes are part of our beat at the Daily Reckoning. We strive to fill each issue with the valuable investing and economic analysis you’ll need to prepare for Federal Reserve meddling… plus a healthy dose of contrarian thinking and dark humor.

Enjoy it, and good luck,

Jim Nelson
for The Daily Reckoning

The Daily Reckoning