These are my quick thoughts on QE3 before my views get corrupted by the financial media:
- Instead of buying treasuries, this time the Fed will focus on mortgage-backed securities ("MBS"), which are essentially treasuries backed by real estate given the government takeover of Fannie Mae and Freddie Mac, with the stated intent of stimulating the still rather tepid real estate market
- This will drive mortgage rates, which are at historic lows already, down further, with dubious benefits to real estate prices. The bottlenecks here, which politicians will not admit, are 1) banks are only willing to lend at those rates to buyers with the best credit, 2) homeowners are not willing to sell and take losses unless they absolutely have to due to life events, and the real estate market will not recover until it finds the bottom
- Thus, the main benefactors of QE3 will be the current holders of MBS, primarily financial institutions, institutional investors and foreign governments
- Corporations have gone through two rounds of QE with the more creditworthy ones sitting on piles of cash and the less creditworthy ones getting by due to low interest rates. This is not going to change with QE3
- There will be a short-term bump in the stock market, which has been fluctuating based on human sentiments and computer algorithms' expectations of Fed and ECB actions. Given that the suspense is over for now, there should be a looser correlation between individual stocks and the general market so in the medium term, companies' revenue growth and earnings will matter more
- Commodities will be the clear winner, and more so if 1) the ECB ends up selling US dollars to buy Italian and Spanish sovereign bonds, 2) bad harvests lead to food shortages, and 3) things get out of control in the Middle East
