Profit Confidential (www.ProfitConfidential.com), an e-letter published by Lombardi Publishing Corporation, a 28-year-old consumer publisher that has served over one million customers in 141 countries, is weighing in on the Federal Reserve’s quantitative easing policy and warning investors about ongoing volatility in emerging markets.
Over the last number of years, the Federal Reserve’s quantitative easing strategy has fueled the stock market rally. By keeping its monetary stimulus in place, the Federal Reserve kept interest rates near historic lows, making it easy for businesses to borrow money to repurchase shares and for investors to borrow and invest in the stock market.
“The low interest rate environment also made investing in emerging markets very attractive. Investors borrowed money at low rates in the U.S., then invested it for higher returns in emerging markets and banked the difference,” says lead contributor and financial expert Michael Lombardi. “After all, if you could borrow money at three percent in the U.S. and invest it for a six-percent return in emerging markets, why wouldn’t you?”
However, Lombardi warns, the so-called easy trades have begun to disappear. The Federal Reserve announced it would decrease its bond-buying program to $65.0 billion a month in February, from its initial reduction of $75.0 billion a month in January. This is after it purchased $85.0 billion per month throughout 2013.
“The pullback on the Fed’s money printing, or what it refers to as ‘tapering,’ is having its long-expected impact on stock prices—they’re falling like a rock,” he adds. “The Dow Jones Industrial Average is down a massive five percent so far this year, gold is unexpectedly rising, and emerging markets are crashing.”
Lombardi explains that the Fed’s money tapering has created increased selling pressure on emerging market economies. Every time the Federal Reserve announces tapering, the U.S. dollar gets stronger. However, this has the opposite effect on the currencies of emerging markets, which have been retracing.
“To combat the currency decline and support the rand, South Africa’s central bank raised interest rates for the first time in almost six years,” he observes. “Turkey is in a very similar situation; to entice investors, the Turkish central bank has taken drastic measures, lifting its overnight borrowing rate from 3.5% to eight percent! The Russian ruble, which has collapsed to multi-year lows, is likewise going through a similar phase.”
“As emerging markets witness a sell-off prompted by a sudden increase in borrowing costs, key stock indices here in the U.S. economy are selling off too. The ’trade’ seems to be ending. January’s return for the S&P 500 now looks like it could be the worst since January 2002!” Lombardi concludes. “Risk-adverse investors are moving back into safer assets, like gold. Unfortunately, I don’t see the pace of the decline in stock prices ending anytime soon. Stocks are still very, very overpriced.”
Founded in 1986, Lombardi Publishing Corporation, which has served over one million customers in 141 countries, is one of the largest consumer information publishers in the world. For more information on Lombardi Publishing Corporation and Profit Confidential, visit www.lombardipublishing.com.
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