I have to admit, I wasn't convinced that the Federal Reserve would do more quantitative easing last night.
I couldn't quite see how it was justified. The stock market's at a four-year high. The US economy is weak, but deflation isn't an obvious problem. And the election is only months away.
I should have had more faith in Blackhawk' Ben Bernanke and his desire to take monetary policy to the outer limits.
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The Fed chairman is determined to reflate the US economy whatever the cost
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What QE unlimited' means for the market
QE3 has arrived. And this time, it's unlimited.
Up until now, the Fed has been printing money to buy up US Treasuries (US government debt). So far, it has always put an explicit limit on the amount.
This time, the Fed has said it will buy $40bn-worth of mortgage-backed securities every month, until the labour market improves "substantially". In other words, for now at least, it is targeting employment, rather than inflation.
This is important. The Fed hasn't even put a number on the unemployment rate it thinks is acceptable. But the Fed's new forecasts suggest that unemployment will be high until at least the end of 2014.
As Paul Ashworth at Capital Economics notes, if the Fed wants unemployment to fall to 7% from the current 8.1%, then that means between two and three years of monthly purchases. That could add up to more than a trillion dollars over three years a similar size to the first batch of QE.
What does it all mean? The Fed is targeting the housing market directly. By buying mortgage-backed securities it will keep mortgage rates low. That should ensure the nascent recovery in the US property market stays on track. We tipped some US housing market stocks earlier this year you can read the piece here: A once-in-a-generation opportunity to pick up prime US real estate. Most of these stocks could no longer be described as anything like cheap but they may still eke out more gains as this news sinks in.
In passing, this move by the Fed raises some interesting questions about democracy and central banking in general. Bernanke insists the move isn't political. That's probably true.
At the same time, it was quite stupid of the Republicans to tell the one man who has more short-term power over US consumer confidence than anyone else in the country, that they were going to fire him if they won the election. If Barack Obama was ever looking for a poll boost from the Fed, this is the best he could have hoped for.
How this affects your investments
If this new bout of QE shows one thing, it's that Bernanke really doesn't care about inflation. The Fed said it is determined to keep going with a weak monetary policy, even when signs of recovery appear. "We're going to give it some time", said Bernanke.
It's the old Greenspan put' again. If at first you don't succeed in blowing a proper asset bubble, try, try and try again. And while the market might start to run out of faith in QE, there's nothing to stop Bernanke from doing even more if he decides it's needed.
So what should you do? Well, stick with the same things I recommended earlier in the week. As I said then, QE or no QE, eurozone stocks look better than US ones, simply because they're cheaper.
Yes, US stocks jumped on QE3 yesterday. But as you probably noticed, European stocks have been surging this morning too.
The one thing that could derail this particular party is the fiscal cliff' in the US. This is the package of spending cuts and tax rises that will kick in next year if politicians can't agree on a deal to prevent it. It's another reason to favour cheap European stocks over expensive US ones expensive stocks generally have further to fall than cheap ones.
And of course, hang on to gold. The yellow metal is heading higher once again, and little wonder. The world's central banks have now fully signed up money-printing as being the solution to all our woes. Even the cautious Bank of Japan is likely to feel the need to react to the Fed's move by printing more money itself to keep the yen weak. The race to devalue is back on. That can only be good for gold.
Another beneficiary should be gold mining stocks. Gold shares have had a tough time, but they've been rising in anticipation of more QE. That's likely to continue. Of course, you have to be picky with mining stocks. This week, conveniently enough, we launched our new precious metals newsletter. Its author, Simon Popple, targets some very specific types of mining stocks that he thinks are best-placed to benefit from money printing in the years ahead to find out more about it, click here.
This article is taken from the free investment email Money Morning. Sign up to Money Morning here .
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