The Federal Reserve on Wednesday increased its QE-ternity program and indicated that it will keep interest rates unchanged until the US unemployment rate falls to 6.5 percent or the annual inflation rate climbs to 2.5 percent, claiming that these yardsticks will make its operations even more transparent and give consumers and businesses ample time to prepare for rising interest rates.

The financial markets barely moved on Mr Bernanke's latest announcement and this suggests that this 'easing' was already baked in the cake. The Federal Reserve's rhetoric notwithstanding, the truth is that America's central bank is desperately trying to ignite the credit cycle and by keeping rates near zero for several years, it is tempting consumers and businesses to borrow.

Furthermore, by swapping mortgage-backed securities with freshly created currency units, it is cleaning up the banks' balance-sheets. By now, it should be clear to everybody that the QE programs cannot bring about prosperity; they are simply there to help the banks and soften the blow of the ongoing private-sector deleveraging.

In terms of the financial markets, I re-iterate that the risk free rate of return determines the value of each and every asset. Thus, by keeping rates near historic lows, the Federal Reserve is artificially inflating asset prices and this is why the majority of the world's stock markets have been rising for almost four years. Furthermore, this is precisely the reason why Hong Kong's real estate is in a gigantic bubble. Last but not least, near zero interest rates are also responsible for the ongoing rally in high-yield bonds.

Today, savers are being robbed by the Federal Reserve's ultra-loose monetary policy and cash in the bank is not a viable option. From my perspective, as long as interest rates remain unchanged, investors should keep the majority of their wealth in good quality stocks, real estate in certain nations (Dubai and US), high-yield bonds and precious metals.

Turning to Wall Street, it is notable that the trend is up for now and the avoidance of the dreaded fiscal cliff will probably ignite a rally. In terms of sectors, I continue to see strength in biotechnology, consumer staples, financials, housing construction and home improvement related stocks.

Furthermore, over the past few days, the industrials have shown some improvement and this implies that investors are not worried about a US recession.

Over in the commodities patch, it is interesting to note that despite the ongoing QE-ternity program, the prices of hard assets are struggling to advance. This should come as no surprise to our readers because for several months, I have maintained that given the sluggish global economy, a sustainable rally in commodities is highly unlikely.

In the currencies arena, the world's reserve currency is weakening and unsurprisingly, the trend is down for now. If the US Dollar Index breaks below the 79.57 level, the downtrend will gain momentum and a deal in Washington may bring about this outcome. Consequently, as long as the US Dollar Index is in a downtrend, I recommend exposure to the Australian Dollar, Canadian Dollar and the Euro.

Finally, over in the fixed income space, credit of all varieties is advancing in tandem and this confirms the desperation for yield. Normally, German Bunds and US Treasuries decline during a rally in risky assets. However, during this surge, even these 'safe haven' assets are advancing! This bizarre price action reveals the power of near zero interest rates and shows that investors are flocking towards all types of income-producing assets. In my view, income-seeking investors should consider allocating capital to high-yield corporate bonds.

(HK Edition 12/15/2012 page2)