Sunday, April 17, 2011

Inflation, corporate profits, government debt and the end of QE2

When U.S. Federal Reserve Chairman Ben Bernanke mentioned the process of quantitative easing (QE2) in late August 2010, most global equity and commodity markets began to move persistently higher. In this environment, equity investors have also benefited from improvements in corporate profits – driven by significant cost cutting. With the QE2 process concluding in June, many investors are wondering, “what happens next?” Additionally, while inflation is muted but rising in the U.S., China and India announced this week that their elevated levels of inflation continue to rise, and some Eurozone policy makers are concerned about this topic as well.

MY TAKE: It will take several months or longer before we will understand if the Federal Reserve’s stimulus efforts stabilized the economy or simply provided a short-term fix. The recent global equity momentum may slow as investors assess: 1) the economic and social challenges that can result from rising inflation, 2) the sustainability of corporate profit growth and the 3) the outcome of debates related to the U.S. Federal budget and the debt ceiling – which currently limits government borrowing to $14.3 trillion.

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