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Michael Swanson: Fed’s Easing Strategy Has Dangerous Outcomes

By    |   Wednesday, 13 Oct 2010 01:50 PM

The Federal Reserve’s plan to launch more quantitative easing, or buying securities to expand its balance sheet, is dangerous for two reasons, says Michael Swanson, publisher of WallStreetWindow.com.

“First, the Fed might print too much money and create inflation,” he told Newsmax.TV Money.

Second, the Fed may increase quantitative easing without any effect on the economy. This is what happened to Japan in the 1990s. “That would hurt business confidence even more,” Swanson said. “That’s the real potential danger.”

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Interest rates are likely to stay low for years, Swanson says.

Meanwhile, the recent tame period of inflation won’t last, and that makes gold and other commodities a strong investment now, he says.

“For the long term we’re in a secular inflationary trend that’s been interrupted over the past 1½ years,” he said.

“So I’m bullish on commodities and bearish on the dollar long-term. Though we’ve had a temporary rally in the dollar, it seems to be coming to an end.”

As for gold, “I’m bullish, because it trades opposite from the dollar,” said Swanson, author of the new book “Strategic Stock Trading”

And it’s not just the dollar, but currencies around the world that are weakening, he notes. “Central banks are printing money, and governments are engaging in stimulus programs, putting pressure on their currencies,” Swanson said. “That’s helping gold too.”

As for the stock market, it’s been in a sideways pattern since reaching its April highs, and Swanson thinks it’s likely to stay that way for the rest of the year.

“I’m advising people to be cautious about the market now: have some good cash reserves in case the economy continues to go lower over the next year.”

We aren’t experiencing a true economic recovery, Swanson says. “There’s been an improvement in the economy since spring 2009, but we aren’t seeing sustainable job growth,” he said.

“Most of the growth we have seen depends on government stimulus. I don’t think that’s sustainable or healthy.”

Real estate prices hold the key to the recovery, because it was the real estate plunge that caused the recession and financial crisis, Swanson says.

“Real estate prices are still declining a little bit,” he notes. “Futures contracts based on the S&P/Case-Shiller index forecast a bottom toward the end of next year. I think that’s when the end of recession will come, and then we’ll have a real recovery.”

A Republican victory in next month’s elections could help financial markets, Swanson says. “Historically, the stock market does better with a split government, so that would be a long-term benefit,” he said.

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The Federal Reserve s plan to launch more quantitative easing, or buying securities to expand its balance sheet, is dangerous for two reasons, says Michael Swanson, publisher of WallStreetWindow.com. First, the Fed might print too much money and create inflation, he...
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2010-50-13
Wednesday, 13 Oct 2010 01:50 PM
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