Where Big Ben Tells Us To Invest…
At just before 4:00 am on Friday morning our local pack of coyotes started howling. I’m certain they caught a rabbit and were enjoying a late dinner (or would that be an early breakfast?). Our three large dogs decided to earn their kibble for the week.
In unison all three dogs started barking… loudly. Needless to say, I bolted upright in bed and I found myself wide awake.
Their barking could have roused the dead.
I knew in an instant I wasn’t getting back to sleep. A short while later – showered and dressed – I flipped on CNBC and started in on the first cup of coffee of the day. Ben Bernanke walked into the picture preparing to address some random conference in Boston.
I turned the volume up and listened intently.
Within a few minutes my heart was racing and my mind was going a thousand miles a minute! Did I really hear what I just heard? Surrounded by a few thousand words of useless blather was a comment about future quantitative easing.
I thought I was still dreaming!
Quantitative easing is a technique central banks once kept their distance from. It’s often a desperate act used by a crumbling government… that was until the near depression of 2008-2009.
Now central banks all over the world are using the technique to manipulate interest rates and influence markets. I’ll tell you why this is a big deal in a moment… but first, here’s how it works.
The Fed has already cut interest rates to ZERO! Officially the target is 0.00% to 0.25%. The exact rate isn’t important… the key is they can’t cut their rates any further.
So how does the Fed further stimulate the economy?
They start buying bonds in the open market! They blatantly manipulate the markets using their bottomless financial reserves (they do own the currency printing presses after all). Those of you knowledgeable about bonds know that as prices get bid up, yields fall.
So the Fed buys bonds, pushing actual interest rates down.
The buying has (hopefully) a ripple effect on the economy. First it makes interest rates fall further. Many commercial loans and residential mortgages are priced off these bonds… that’s why home mortgages are at record low levels.
The hope is, banks lend out money cheaply and consumers borrow cheaply. That borrowed money is then used to buy goods and services. In a perfect world, all the borrowing and buying would stimulate more borrowing and buying… and eventually the economy would recover.
But we’ve run into a problem.
Banks aren’t lending, consumers aren’t borrowing, and nobody is spending. Economic growth in the US economy is sad at best.
The only impact we’ve seen so far is the destruction of the US Dollar.
Remember, the Fed is running the printing presses full time… that’s where they get the money to buy the bonds. The Fed pumps dollars into the economy and with more supply the dollars in your wallet are losing value every day.
When the value of the US Dollar falls it makes everything more expensive. Don’t believe me? Just look at commodity prices. Think about it… if aluminum costs more, the products made out of aluminum cost more… and customers have to pay more. That’s called inflation!
And none of these commodities are retreating.
Gold and silver are skyrocketing. Grains are at yearly highs. So are industrial metals like copper. Energy prices are climbing… and none of them are looking back.
Where’s this all going?
That’s what’s so shocking… Big Ben and the Fed are still trying to juice the economy. Ben all but said he would implement another round of quantitative easing. That’s what got my heart and mind racing. The press has nicknamed this action “QE2!”
When Ben starts running the presses even faster… and buying more bonds… and pushing interest rates even lower… You can bet your bottom dollar inflation will show up in a big way. And that tells me to seek out investments in hard assets… like commodities.
Hard assets tend to climb in deflationary times and commodities are an easy way to invest. I like the opportunity silver offers. The commodity has had a big run recently. But any pullback, should be a great buying opportunity.
Take a look at the iShares Silver Trust (SLV), it’s an easy way to invest without actually trading a commodity future. It could run to new highs when Big Ben starts up QE2.
Category: Bonds
