How to Invest Around the FedJul 12 • Categorized as Investments
by Henry Salta, Registered Financial Advisor
International Diversification of Investments
This past Wednesday, the Federal Reserve, in all of its wisdom, announced an extension of Operation Twist. This monetary program is designed to hold long-term interest rates down, as if a 2.5% yield on a 30-year bond isn’t low enough! In my opinion, this is just a ploy to try to keep the markets afloat until the election in November.
Funny thing is, the Fed really didn’t need to do anything. Europe is doing its job for them. The sovereign debt crisis hitting Europe has unleashed a flood of money into the perceived safe-haven of the US Dollar. All of this buying of the dollar is keeping rates low. Operation Twist is just a gimmick to push them even lower, but it will ultimately create massive losses for the Fed when rates ultimately rise.
So, the big question is, will Operation Twist and the European Crisis be enough to hold US interest rates artificially low until November? That’s a tough one. My first inclination is “no.” A lot can happen in 4 months.
Just think what has happened in the last 4 months in regards to Greece and Spain. If the European situation abates a little, then the focus will be across the pond, on the United States. If the problem is too much government debt, and too much spending, then the US is the biggest offender. The markets haven’t punished us for it quite yet. But they will.
Remember, a couple of years ago, Greek bond yields were at historic lows, just like ours.
The only way to keep this from happening is by printing money. The Greeks, as did the Spaniards, and Italians, and most of Europe for that matter, gave up their printing presses for the Euro. And on this is actually a good thing. If Germany can convince the ECB not to print, then Europe will be much better off.
It will be painful to restructure, as we are witnessing that in Greece and Spain. But if they can make the right decisions to cut spending and take the pain, Europe will emerge much stronger. I know that’s a big “if,” but at least they have Germany over there trying to force austerity.
The United States is going to take a different approach. We are going to print more and more to inflate our debt away. We have been able to get away with this so far because the US Dollar is the World Reserve Currency. Everything settles in dollars, so there is constant demand that is artificially keeping the US Dollar afloat.
This dynamic cannot last forever, in fact, it cannot last much longer. There will come a tipping point when our creditors, just like Greece’s and Spain’s creditors, will get nervous. Whether they fear outright default or devalued currency won’t matter. They will start selling their dollars more rapidly and the house of cards will come down here in the US. The fact that we have a printing press will make things worse because not only will our foreign creditors lose their purchasing power, but every person holding dollars will as well.
So, what can we expect in the next few months? It’s hard to say exactly. Economic crisis always take a lot longer to start than expected, but then once they start, they unravel a lot quicker than anybody could think possible – 2008 was a good example. The bubble could have popped in 2006 or 2007, but it wasn’t until 2008 when it finally did. But when it did, the largest banking institutions in the US were bankrupt within a week.
I think the Fed will try to hold off as long they can on QE3. They don’t want to send gas and consumer prices higher going into the election. But they also have to keep the stock market up at the same time. This is what they believe Operation Twist will accomplish. It most likely will not work. You can’t have it both ways. It either all goes up or all comes down. That’s what artificial stimulus does.
I think there is a good chance the Fed will induce another round of stimulus before the election, and it could be within the next month or two. As a matter of politics, if they are going to do it, they will need to do it soon. Once the election gets closer, it will be harder and harder to justify QE3 as being non-partisan. But even if they hold off until the election is over, another round is sure to be in our near future, and that round of stimulus could very well be the overdose.
I recommend using a 3-bucket approach to prepare for what is going to happen. Now, everyone is different, so for some folks, the amount to place into each bucket will vary.
The first bucket consists of precious metals.
The second bucket consists of mainly foreign, but some domestic dividend paying securities.
The third bucket consists of currencies, including the US Dollar.
I also think it could be very rewarding to take 5-10% and invest in mining companies.
They are very beaten down now and I think one day we will see a massive bubble form in those companies. It may be a little early now, but it’s better to be too early than too late.
In conclusion, once you understand what the problems are, and more importantly, what the government response will be, then you can make prudent investment decisions. It will look messy at times, but as long as you are prepared, you can profit from the upcoming collapse. Europe is merely the warm-up. The United States is the main event.
Editors Note: For additional information on this and similar topics, please see PremierOffshore.com