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Last Thursday, the Federal Reserve unveiled its latest monetary policy: unlimited QE. Basically, the Fed plans to buy bonds and keep interest rates as low as possible until unemployment comes down the economy starts growing at a healthy clip.Goldman Sachs’ David Kostin succinctly talks about the costs, risks and investment implications in a new note to clients:
The new policy has costs, risks, and investment implications. The “cost” of a sustained low interest rate policy is borne heavily by those dependent on fixed income where low yields make it difficult to cover living expenses. Yield is rare in the current investment environment. Our Dividend Growth basket should outperform given the premium yield (2.7% vs. 2.2% for SPX) and dividend growth (15% CAGR through 2014 vs. 8% for S&P 500).
The primary risk of an easy monetary policy is a surge in inflation. The Fed believes it will be able to control potentially rising input prices. (For details on the “QE3” announcement see US Daily: Fed tries to shift economy into a higher gear, September 13, 2012). Growth is a scarce commodity in a weak economy and our High Revenue Growth basket should outperform.
Asset inflation is a likely consequence of the new Bernanke doctrine. S&P 500 has surged by roughly 5% during the two weeks since the Jackson Hole conference when Bernanke outlined the rationale for “QE3.”
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