It’s no secret that the Federal Reserve and the Federal Government is lacking a spine when it comes to policy decisions. In fact, if there is one thing you can bank on it is inaction, as that seems to be the most consistent theme coming out of Washington.
Last week many pundits were expecting the Chairman of the Fed, Ben Bernanke, to announce that the Fed had commenced its “tapering” operations. If you’re not familiar with the term, it refers to the huge bond-buying program the Fed has been engaged in for several years, since the Financial Crisis of 2008. They buy debt, all types from mortgage or governmental debt in an attempt to hold interest rates low and stimulate economic activity. The number is in the trillions of dollars to date. And even with all of that stimulus and insanely low interest rates, the US economy is barely posting 2.3% GDP growth.
To be sure, the stimulus has worked to steady the economy but the anemic growth in the face of that entire stimulus shows how weak underlying conditions really are. For our Insider Portfolio (our CHIRP service) this inaction is great news and we have been taking advantage of it, and continue to take advantage of the favorable market conditions.
If there is one certainty, it is that the low interest rate environment we are in will continue for at least another year or more. Rates may move higher, but they will still remain stubbornly low from a historical perspective. And that won’t change soon because of a bevy of reasons.
First, economic growth as measured by employment is just not strong enough with the unemployment rate still well above 7%. We would need to see it break 6.8% before any sort of victory could be declared, and that will not happen soon. Just last week a slew of companies from Darden (DRI) to The Cleveland Clinic announced layoffs in order to deal with the economic impact from Obamacare being forced on them. More layoffs are on the way and many companies which will not layoff, will switch employees from full-time status to part-time status by cutting hours so that they don’t have to deal with the onerous health care provisions and costs. This is not going to stimulate growth or employment.
Second, the new Fed Chairman will likely be a woman, Janet Yellen, who is a “dove”. This means that she subscribes to the economic principles that Bernanke subscribes to, and that is stimulative monetary policy – that is, more printing.
There is some light at the end of the tunnel if numbers from Europe and the emerging markets are to be believed as growth in both regions is beginning to pick up, and Carl Delfed, our resident foreign markets guru is watching that space for you. But even that growth is from a deep recession, especially in Europe, where many countries are facing double-digit unemployment and major structural deficiencies will not enhance growth prospects. But emerging markets are cheap from a historical perspective and you may want to stake a claim in the Vanguard Emerging Markets ETF (VWO), which sports very low fees and broad exposure to many markets.
And, if you’re a believer that economic principles are real and not made up, you need to seriously start looking at accumulating gold or gold shares on any type of meltdown in the precious metals complex. Printing money in the quantities that we are seeing must at some point result in a debasement of the US Dollar. It’s a supply/demand issue and there is no lack of supply. When that event happens – the realization that the world is flooded with greenbacks – the US dollar might plummet in value overnight and that will force investors to flee to gold as an inflation hedge. It hasn’t worked yet but ultimately the price of gold, regardless of how much or when it corrects, will move markedly higher and quickly at that. You can get exposure to it through the Gold ETF (GLD) or through a myriad of companies like GoldCorp (GG) or Newmont Mining (NEM).
To your wealth,
Banker X.
