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MLR - PMMP 9/15/14

Major averages fell on higher volume, marking a third day of distribution on both the S&P 500 and the NASDAQ Composite. The US dollar has been strong as of late as its economy is slightly outpacing the lagging economies in the UK and in Europe. In addition, the Scottish independence vote puts pressure on the British pound, and the European Central Bank's decision to increase quantitative easing helps bolster the dollar relative to these currencies. But it's not a matter of the hare and the tortoise but more like three tortoises racing at recessionary speeds as QE pushes US markets higher in a lackluster manner while European and UK markets have broken their uptrends. But over the last few years, European and UK markets tend to lag US markets, and this seems to have little effect on pulling US markets lower. Instead, US leads the way and pulls European and UK markets higher. And with the ECB printing more aggressively, this may help push European markets catch up to US markets.

As for the future of QE, the Fed has a two-day policy meeting this week which concludes on Wednesday. Since March, the Fed has used the phrase “considerable time” to show it will hold rates at unusually low levels after it stops buying bonds, now on track to end in October. Thus the Fed has other tools in its war chest to keep rates low.

Specifically, the Fed has said: “The Committee continues to anticipate, based on its assessment of these factors, that it likely will be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends, especially if projected inflation continues to run below the Committee’s 2% longer-run goal, and provided that longer-term inflation expectations remain well anchored.”

Given the sluggishness of the economy, the Fed realizes it will have to keep rates low to avoid derailing the fragile recovery so rates will probably remain at historically low levels for longer than expected, as the portfolio manager of the world's largest bond fund, Bill Gross, has said.

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