We are all well aware of what the Fed and US Treasury have been doing to fight the recession. In physics we are taught that for every action there is an equal and opposite reaction. We believe that this law of physics also applies to the financial markets as well (although it does not apply as objectively as it does in physics). For now it appears that the Fed has snatched the US economy from the jaws of recession/depression with its various “stimulus packages”(action)…..however, there is a cost (reaction). We would like to highlight a piece from Gary Dorsch of Global Money Trends Magazine. We think that Dorsch has “hit it on the head” with his succinct summation of the current scenario:
The Fed has embarked on the biggest money printing operation in history, dwarfing the money printing by other central banks by a large margin, which in turn, is weakening the US-dollar against all major and exotic foreign currencies, such as the Brazilian real, the Mexican peso, and Korean won. Dallas Fed chief Fischer won’t admit the inflation genie has already left the bottle, and what lies ahead for the US-economy is a long period of stagflation. The strength of the US stock market is largely due to massive money injections by the Fed, and excess liquidity is channeled into equities by Wall Street Oligarchs. Stock prices are outpacing earnings, pumping P/E ratios to risky levels, indicative of market bubbles.
OK so what are the consequences of all this (the cost of the stimulus packages)? Have a listen to what Marc Faber is saying in latest discussion regarding inflation (actually hyperinflation). This is what Dorsch is saying:
Ben “Bubbles” Bernanke is following in the footsteps of his mentor, “Easy” Al Greenspan, by monetizing the commodity and stock markets, to avoid the risk of deflation and economic depression. The next stop on Big Ben’s helicopter ride is “Stagflation,” – a nasty combination of rising unemployment and higher inflation rates. To profit from “Stagflation,” one can expect gold and silver to outperform the stock markets of the developed nations, which are big oil importers.
Once again, it seems like déjà vu, – a replay of previous years, with crude oil and the US-stock market moving higher at the same time, elevated by a weaker US-dollar and the hallucinogenic QE drug, which gives traders an artificial high, and whets the appetite for greater risk. Yet this scheme of artificially inflating stock markets can lead to dangerous side-effects down the road, and the next major financial crisis, – a crash of the US-dollar, and triggering a sharp upward spike in long-term Treasury and corporate bond yields. The last time a sharply lower US$ led to higher bond yields and a bona-fide stock market crash was in October 1987.
Could all this easy money/liquidity be sucked up before inflation hits? The Fed thinks so, but we think not. We think that Fed officials are seasoned propaganda artists and US Treasury officials aren’t far behind:
On June 2nd, Bernanke said the US-dollar does not face a near-term risk of losing its reserve currency status, “I don’t see any risk in the foreseeable future to the dollar’s status as a reserve currency,” Bernanke told the House of Representatives. “I think the issue at hand is not whether the US-dollar will retain its value, – I think it will. I think the dollar will be strong, because the US-economy is strong, and it will also be strong because the Fed is committed to assuring that we have price stability in this country,” Bernanke declared.
How do you have a strong currency when supply or that currency is increased more than at any time in history? Clearly the actions of the Fed are amiss with its words! We believe things only when we see it…i.e. judge people by actions not words.
Right now the bond and commodity markets are suggesting that inflation is already hitting. The obvious way of playing this is long commodities (DBC, RJI, GSG, GCC, or DJP), short US Treasuries (long TBT or RYJUX), and “perhaps” long commodity equities (OIH and XLB).
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