Total Returns %

1 Week

YTD

Dow Jones Industrial Average

-1.54%

+2.43%

NASDAQ Composite

-2.65%

-0.35%

S&P 500 Index

-1.92%

+1.72%

Russell 2000

-1.02%

+1.40%

U.S. Aggregate Bond Index

+0.27%

+0.16%

MSCI All Country World

-2.22%

-0.47%

Source: Yahoo! Finance.  Data through 3-18-11

The market this past week wasn’t much different than the week before.  As always, uncertainty brings volatility.  The events in Japan and the Middle East will continue to provide ups and downs for the global markets.

The markets over the last 18 months have been taking decisions that have significant long-term negative consequences, as positives.  Currency interventions, printing money, and massive debt is not good for the markets in the long-run, but in the short-run apparently it is good. 

In the meantime, this kind of market action makes managing a portfolio difficult for those that are aware of the longer-term effects.  To be clear, the long-term effects are inflation, rising interest rates, slower economic growth as debt balloons, and potentially a collapse of the US dollar.  Some of this can be prevented, but the powers that be are not making the tough corrections to our economy that need to be taken.  While the market run-up we have seen in the short-term is great, it will not last indefinitely.  Having the ability to look out further (you don’t need a crystal ball as history shows what happens to excessive debt and debased currencies) helps to position portfolios for the future, while taking advantage of today’s opportunities.

I still believe one of those opportunities is investing in gold.  The chart below shows gold in red and the US dollar in black over the last 10 years. The dollar has lost 30%+ of its value relative to a basket of foreign currencies, and gold has risen from $275 per oz to over $1400 – that is more than 400%.

The multi-level disaster in Japan, and the resulting global economic actions, is a great example of how wrong-headed global economics (as driven by global central banks) has become. 

In the overnight of March 17th–18th, the G-7 global central banks came together and decided to sell Japanese Yen to drive down the Yen from rising.  Why would Japan want their currency to go down in a disaster?  A stronger Yen would reduce the cost of all the imports they are going to need to rebuild their infrastructure.  A stronger Yen would also drive down oil, copper, steel, cement, etc.  But, instead of riding a strong currency, they are debasing the Yen and printing money by injecting liquidity into their already overly-indebted country.

The answer to why Japan chose a weaker Yen lies right here in the US and the Federal Reserve.  Japan is the second largest holder of US debt behind China.  Japan sits on $900 billion of low-yielding US Treasury investments as reserves (as most countries have).  So, instead of debasing their currency (making imports more expensive) and increasing their debt, why not sell some US Treasuries to raise the capital they will need to rebuild?  The answer is that Japan fears that selling a big portion of US Treasuries would speed-up the US dollar’s demise and reduce the value of the US Treasuries they would still be holding.  This begs the question – Why have the reserves in the first place if you cannot use them when you need them?  Japan is more concerned about propping up the US dollar so they can export to the US, versus lowering their import costs.  In the end, Japan will likely realize they cannot rebuild and prop up the US dollar.

Would you like an analysis of your current investment portfolio?  Call me to schedule your free consultation- 913.693.7918.

John P. Chladek, MBA, CFP® is the President of Chladek Wealth Management, LLC, a fee-only financial planning and investment management firm specializing in helping families and couples who are not yet retired realize their financial goals.  For more information, visit https://www.chladekwealth.com.

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