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(snip)"Stocks fell further Wednesday after the Federal Reserve announced another reduction in its monthly bond buying program. Investors also continued to be worried about emerging markets and weak earnings.
The Dow Jones industrial average was down more than 200 points shortly after the Fed meeting. Dow components AT&T (T, Fortune 500) and Boeing (BA, Fortune 500), which both offered earnings guidance that disappointed investors, were among the bigger losers The S&P 500 and the Nasdaq both fell more than 1%. (snip)
(snip)In a widely expected move, the Fed said it will now buy $65 billion in bonds each month, beginning in February. That's down from $75 billion this month and was the second $10 billion reduction in the Fed's long-standing quantitative easing policy since the central bank started its so called tapering. (snip)
As most dollar den readers already know, the US FED has been pursuing a 'stimulus' policy of printing up ( out of thin air ) $85 per month in 'new' money, and effectively purchasing $85 billion per month worth of securities ... with much of that taking the form of US treasury bonds. Last month the $85 bil dropped to $75 bil, and this month the $75 bil dropped to $65 bil. Why is this of any interest to dollar den readers ???
- with the FED reducing bond purchases, and the gov't needing to continue selling new bonds to fund deficit spending, the way to attract 'substitute' buyers is by offering higher interest rates. Higher interest rates on T-bonds will propagate to higher interest rates on other types of loans, from mortgages to auto loans to credit cards.
- with ( implied ) higher US dollar denominated interest rates, the exchange rate of the US dollar is rising versus other currencies. This is generally not good for US companies that export to foreign countries, nor for US based international companies who book a large percentage of their sales in foreign currencies that must be converted back to US dollars. For one example, the US$ / CDN$ exchange rate is now over 1.11 ... meaning that Canadians can't afford to buy American products priced in US$, but that Canadian imports are cheaper for Americans to buy than domestic products.
- with $10 bil per month less 'hot money' being put into circulation, that means nearly $10 billion that is no longer finding it's way into the US stock markets. Reaction has been immediate, with a 200 point drop in the Dow within minutes of the FED announcement
- with the resulting volatility in currency exchange rates, commodities from gold to gas to oil are all rising in value ( supposedly as a 'safe haven' for uber-rich investors wishing to avoid future exchange rate losses ). This could soon translate into higher US gasoline prices, higher US utility bills, higher prices for products which require lots of energy input ( like food ), etc.
- with the strengthening US$ exchange rate versus most other currencies, uber-rich investors are selling off their 'risky' investments in foreign stock markets ( to avoid additional exchange rate losses ). This in turn is causing foreign stock markets to drop ... with 'emerging market' countries dropping substantially !!!
Moral of the story is arguably this. Today's FED announcement confirms earlier suspicions that the FED will 'remove the punch bowl' which has kept US interest rates low and kept US stock markets rising since the 2008 'crash'. If you are stlll holding US stock shares or bonds, you owe it to yourself to re-evaluate your investment position.



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