The Fed announced today a new round of quantitative easing – QE3. Stocks are rallying today, with the Dow up over 200 points. This is the natural reaction to this news for the short-term, but the longer-term reality is that the Fed is borrowing this money, which will contribute even more to our national debt. The previous two rounds of QE have contributed $2 trillion to out $12 trillion national debt, or about 20%. As with all debts, this one will have to be repaid eventually. The more they borrow, the harder it is going to be to repay, the fewer our financial options in the future, and the more vulnerable we will be to economic challenges. Inflation is no doubt going to become a major problem in the near future, which will force the Fed to raise rates. Rising rates will make the cost of servicing that massive national debt skyrocket to levels that frankly are unsustainable. I am not talking about something that we need to worry about in 25 years. This is coming within the next few years, and could start as early as next year.
My advice is to take this gift, if you are long stocks, sell into this rally, lock-in profits before the elections, and sit on the sidelines until things calm down and valuations come back to earth.