September 13, 2012, we have watched the Federal Reserve Bank inflate
the money supply @ $85 billion each month, in an effort to drive money
out of banks and out from under mattresses, into the equity markets. The
plan has worked. A second, important purpose of that plan has been to
make American goods and services cheaper on the world markets. However,
that dollar weakness has not materialized; in fact, the US dollar has
recovered half its lost strength from the decline that began in 2002.
Within the past week, the European Central Bank has slashed its cash
rate from 0.75% to 0.50%; the Reserve Bank of Australia has cut its base
interest rate from 2.75% to 2.5%; the Bank of Korea cut its rates and
is threatening to intervene due to capital flows into that nation; the
Reserve Bank of New Zealand has intervened to arrest appreciation;
Sweden is threatening to intervene to weaken its Krona, and the British
pound is in the trash. The Bank of Japan, of course, has been weakening
its yen since Abe’s election last fall. Meanwhile, the Federal Reserve
is looking for an exit strategy for its own stimulus; therefore, to the
extent that $85 billion/month has been acting as a damper, that
influence is growing long in the tooth. This has been a big driver for
USD strength over the past months. In direct consequence, we have now
seen the USD index recover half its lost strength since 2002, at the
same time that the equity markets have climbed to new record levels.
Meanwhile, nobody’s making money: Yields are down; more and more
money is being put at risk for lower and lower yields and the only way
to make money is by riding this very risky, top heavy appreciation curve
we see in the stock markets.
I don’t like this environment. Do you?
If the Federal Reserve were to stop its artificial stimulation of the
American equity markets, what reason would there be to remain in risky
stocks, with yields already so low? The rationale to be in stocks would
evaporate, the stock markets would crash and money would go flying back
into the US dollar and the yen so fast it would make your head swim. The
threat of that eventuality is a strong inducement to continued loose
monetary policy. On the other hand, it is causing a worldwide currency
war in which central banks around the world are engaging in efforts to
weaken their respective currencies in relative terms, just to keep pace
with the Fed; beefing up stock prices; nobody is making money, and stock
prices march upwards.
Watch consumer spending.
In the event the Fed backs off of its mad stimulus efforts, equity
prices will fall suddenly, and the US dollar will continue to
strengthen. The EUR/USD would fall; European and British stocks would
become attractive in US dollar terms, and oil would…probably fall.
I think the best investments right now are things you can hold in
your hand. This is a great time to spend money on long terms supplies;
elective surgeries that enrich your life and preserve your health,
munitions, water; and to put sizeable portion of your money into
physical cash. Physical cash can’t be frozen in your account because of
your country’s debt woes, as happened so recently in Cyprus.Furthermore,
in the event of a liquidity shock, cash purchasing power will explode.