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Will QE3 Improve the Economy?

Ron DeLegge

Fed Chairman Ben Bernanke said that national unemployment is a 'grave concern' and he's going to do something about it. That "something" is called quantitative easing (QE) and the stock market (SPY - News) is already going bonkers over the possibility of a third round.

This raises a few questions: Will QE3 really improve the economy and job market? What impact did previous versions of QE have, if at all?

The Big Picture

If a picture is worth 1,000 words, then the chart below is worth at least 2,000.

I analyzed the impact of the Fed's $2.3 trillion in monetary spending or QE since 2008 and noticed an alarming trend: Little actual change in the national unemployment rate. (VIDEO: Municipal Bonds: Myth vs. Reality)

Our chart below, courtesy of the ETF Profit Strategy Newsletter, plots the headline unemployment figure (U-3) and the more comprehensive figure (U-6).You'll notice that national joblessness is higher today, despite the impressive efforts of QE1, QE2, and Operation Twist over the past several years.

For comparison purposes: In late 2008, U-3 and U-6 were 6.8 and 12.7 percent. Fast forward to today: In August 2012, the U-3 and U-6 jobless rates were up to 8.1 and 14.7 percent.

What does this show? That past versions of QE had little positive affect of the broader economy. Then what has QE3 done?

Injecting the Wrong Patient

In medical terms, here's what QE equivalent is like: It's tantamount to injecting the wrong patient with a drug prescribed for someone else. While the broader economy - QE's intended patient - is still very sick, precious metals (SLV - News), stocks (DIA - News), and bonds (TLT - News) have gotten a huge boost. Other high risk assets like junk bonds (JNK - News) have followed suit.

If you're a doubter in the massive rally behind this market's latest move, you're not alone. Genuine bull markets don't need monetary stimulus to fuel them. You don't need to trust this market, but unless you learn to respect it, you're bound to get crushed by ill-timed moves. 

Which ETFs and investment categories will benefit in the future from more central bank stimulus? The ETF Profit Strategy Newsletter analyzes market conditions using technical analysis and identifies key support/resistance levels for the market's next big move.   


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