This past week could not have ended sooner. The big news of the week was the Fed’s announcement of the much anticipated “Operation Twist II.” The Fed will be selling $400 billion in short-term treasuries and buying the same amount in long-term treasuries. This left the market sour as investors were looking for more purchasing of bonds – not a net zero. I think of other great importance is they acknowledged the significant downside risk for the economy. One analyst was quoted as saying the Fed hit the economy with a canon (QE I), pistol (QE II), and now a squirt gun.
QE I and QE II were sold to the public as one thing, but were later clarified for their real purpose, and that was to stabilize/lift the stock market. QE I saw the market lift with little-to-no change in the fundamentals of the market. The market dropped off in the summer of 2010 only to be picked back up by fall 2010 with QE II. QE II lifted the markets for some time, and the markets again dropped off this past June. Both times the market has been shored up, but after that lift from the Fed, investors have found themselves in a far worse position than they were before. The current surroundings are 14% of the US populace on food stamps, very serious commodity inflation, 9.2% unemployment, a $3.6 trillion dollar budget, an unfathomable amount of national debt, and politicians fighting S&P about a sovereign downgrade that is completely deserved. I stated a few months ago that this would be a rough summer if the Fed really did end QE II; that assumption was correct. Thank goodness fall is here…
Operation Twist is not QE (Quantitative Easing), and we now see how the market reacts to not getting its way with more QE. QE is not off the table in my opinion. As I have said, the Fed will need to be begged back into the QE game. In the days leading up to the Fed’s recent meeting, members of Congress wrote the Fed asking them not to intervene in markets. Since the first two rounds of QE were aimed at supporting stocks, and stocks are not in deep pain (yet), we will have to wait for the next ride. Of course the Fed could have learned that the QE’s did more harm than good and will do no further QE which could be viewed as stock market austerity. Either way, there is pain ahead.
Of important note let’s remember some depression history…Prior to the great depression there was a market boom floated by easy money, an implosion of the stock markets, currency wars, followed by trade wars, then finally a world war (II). Let’s check today’s facts: easy money (check), implosion in stock markets (check and maybe another), currency wars (check), trade wars (check)…
Last week, Brazil slapped on a 30 percentage point increase in import tariffs of automobiles. A major objective of this tariff is to slow surging imports from China. Earlier this month, Brazil enacted important tariffs on certain steel products from China. China is the largest trade partner of Brazil, which both heavily imports from, and exports to, China. Sounds like trade wars are heating up. I am not saying a war is around the corner, but I am saying the current economic funk is looking more and more like history.
We are still seeing continued manipulation in the metals markets aided by the inept, toothless regulatory agencies. But, while we see the futures pricing mechanism being monkeyed with, there are still very few people holding the physical metals that are selling. The reality is the last few weeks have had significant bullish news for the metals. Is it any wonder that gold saw a massive drop four minutes before the Swiss announced the devaluation of their currency? Is it any wonder that the gold manipulating central banks are toying with gold as the economy is going backwards, massive amount of money is being created globally, and Europe is smoldering? The favorable environment for precious metals is still alive and well and gets better everyday regardless of what the futures price shows. Everyone must remember that for every ounce of gold and silver above the ground, there are hundreds of claims on those ounces. What that means is once the global political and financial farce breaks, the metals will move (and more than likely rapidly) as people scramble for physical metals and not the paper claims. Regardless of the price monkeying from above, the pressure pushing the metals higher is overwhelming. Why else would the price of the metals have been rising for the last number of years? In my opinion, the best way to protect wealth in the current political, social, and economic stew is the metals. Since the environment has not changed, then price monkeying should not scare off people looking to protect their wealth.
Do you have an investment strategy that seeks to protect your portfolio against volatile economic conditions? Call me to schedule a free review of your current investment portfolio – 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.