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Vol. 252 - The Fed Knows
The Federal Reserve's move on Thursday to keep interest rates at record lows until late 2014 is a very telling monetary policy strategy.
Ben Bernanke's decision tells us that the economy is not recovering as robustly as it may have seemed in recent months. Or more importantly, that the US is a long way from generating sustainable growth. Why else would the Fed implement such a prolonged and historic monetary easing policy?
The Fed continues to do everything in its power to flood the market with free money, not just by printing, but by enticing companies to lend and spend at these low rates. It's encouraging savers, consumers and investors to borrow, invest and spend. This is achieved by creating a negative real interest rate environment. If a bank's deposit rate is close to zero and inflation is hovering around 2-3%, savers are actually losing money each year by not investing into alternative investments that provide a higher yield. This kind of environment hugely benefits the debtor and not the creditor as the debt is inflated away more and more each year.
For investors or corporations sitting on cash, the message is clear: invest and spend or watch your wealth erode. The Fed is making cash so unattractive that individuals and companies alike, will be forced to seek out higher yields, whether in the stock market, in real estate or other in asset classes that typically appreciate when the dollar is depreciating.
The Currency War is Intensifying
It was less than two weeks ago when China made a big statement saying that it would look to ease monetary policy to support its export market, which recently hit a 2 year low. The Fed retaliated this week and is letting China know that it doesn't plan on giving up any ground in its fight to inflate. Have a look at the below 120 day chart for the yuan. Although the value of the yuan remains pegged to the USD, its value has been trending lower for a while now. When you are dealing with trillions of dollars, even a few hundredths of a cent equate to billions of trade dollars and thousands of jobs gained or lost.
Remember that a cheaper currency means cheaper goods, more production, more jobs and more GDP, which always translates into more tax revenue.
The bold action taken by the Fed this past Thursday will only intensify the ongoing currency war we have discussed constantly in past weekly volumes. Late last year in Volume # 246 we wrote that,"The underlying message here is that the Fed is not going anywhere. It is watching everything and is preparing to continue to flood the markets with cash. Inflation is coming. Be patient and it will carry us up again. "
Carry us up indeed. The markets, gold and most commodities soared this past week, extending a rally that saw major markets and many metals breakthrough key 100 and 200 day moving averages. Gold had a monster week and rallied hard after chalking up its first quarterly decline in 3 years (Q4 2011). Gold was relentless this week and closed near $1740 an ounce, up almost $100 in 5 trading days. It's amazing how those gold naysayers seem to just fade away during a week like the one we just had. Gold isn't going anywhere and it better stay firmly on your radar screen.
Our team remains overly bullish on commodities, precious metals and equities with advanced developed projects in mining-friendly jurisdictions. Copper hit multi-month highs and is once again flirting with $4 per pound amidst surging global demand.
When gold and stocks are on the rise, it's a safe bet to assume the US dollar is falling. The Fed announcement achieved its desired effect as the US dollar plummeted against a basket of global currencies, but most importantly against the yuan. The US is hell-bent on devaluing its dollar and stealing back manufacturing jobs from China. Obama spoke about it in length in his State of the Union address.
Bill Gross, who runs the world's biggest bond fund at Pacific Investment Management Co. stated that,"A third, fourth and fifth round of easing lie ahead." He wrote this in a Jan. 25 Twitter post.
Bloomberg recently reported:
Fed Chairman Ben S. Bernanke laid the groundwork for a third round of quantitative easing through asset purchases, a so-called QE3, saying two days ago the Fed is prepared for further "accommodation."
Whether or not accommodation means QE3 is yet to be known, but what we do know is that the Fed is staying at the table and will not take its foot off the gas. The Fed knows, deep down, that if interest rates go up, the US economy will collapse and the debt it has accumulated over the past 15 years will never, ever be repaid.
The Fed and the US government are all-in and continue to manipulate the markets by providing free money and in the process, have now created one of the most accommodative monetary policies in the world. We will know soon enough if this works to spur the markets and the US economy.
Obama continues to stack the deck and is doing everything in his Administration's power to calm investors and create an atmosphere of recovery and future prosperity.
In Vol. #249 we wrote that, "In the last 21 election years, since 1928, the market (S&P 500) has contracted only 3 times - none more severely than in 2008, when the market lost 37%."
In 2008 the markets collapsed, but the trigger was building for years and it was a situation where the flood gates of reality had finally blown wide open. Deleveraging set in and there was nothing anyone could do. It was also President Bush's final term. In Obama's case, it's his first term and he wants back in. There is no limit to what Obama and the Fed can do when it comes to manipulation in these markets. This is an election year and our team expects robust economic numbers to continually bombard the American public for the next 9 months. Obama's re-election depends on it.
In these times of heavy manipulation and prolific government and central bank intervention, you have to align yourself with the trend. If as an investor you remain stubborn and do not position yourself to benefit from monetary policies, you will face losses. It's that simple. The markets are due for a short-term pullback, but until the US election, we remain bullish on commodities and the overall markets.
All the best with your investments,