The big news this past week was the Fed’s statement on Wednesday that they would maintain “exceptionally low rates through at least late 2014.” In layman’s terms, this means the Fed will be printing money to purchase treasury bonds to keep interest rates down. Keep in mind that interest rates are not supposed to be naturally this low. Interest rates, if left unmanaged by the Fed, would find a balance in the market place based on supply/demand fundamentals and credit worthiness. Since the economy is in a funk, the Fed wants to keep rates low for a multitude of reasons (mostly the wrong reasons). The only way to fight the natural tendency of rising rates is to artificially suppress rates through the purchase of government bonds.
Recent history shows that Wall Street’s reaction to the news of more money printing has been positive as it means the economic “can kicking” will go a little farther. One of the other benefactors of the Fed statement has been precious metals and the precious metals miners. The metals and their associated miners stand to benefit since it is becoming more evident that the Fed is going to stimulate for quite a while – The result being the US dollar will continue to decline in value.
I think we can all agree that having a strong base in just about any endeavor or structure (e.g., pyramids) is beneficial. Consider a marriage that has a healthy foundation based on trust, honesty, and communication has a much better chance of making it than a marriage that lacks such traits. For marriage, a strong base makes it possible to weather the storms life will throw at a couple. If we turn our attention to the state of the US economy (as well as those of Europe and Japan), we certainly do not see strong bases. By extension, the global investment markets are impacted by economics since economies are the platform upon which markets stand. A strong base for an economy allows economies to weather storms, but it also allows businesses, entrepreneurs, and investors to take risk.
I point this out because it is very easy to watch the investing markets over the last few years and think if the markets are doing ok, the economy (base) must be ok. Nothing could be further from the truth. While the stock markets may show brief signs of strength, the key is to understand why. Much of the strength behind the market is derived from global central bank interventions, hedonic adjustments and massaging which has produced short-term bursts in stocks, but very little in real economic terms (unemployment, manufacturing, etc.). So, if the base is not strengthening, it is likely everything balancing above the base is susceptible to a fall with little effort – Hence, the extreme volatility in global markets. This current environment is why I choose to be cautious.
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 – 913.402.6099.
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 http://www.chladekwealth.com.