[caption id="attachment_1516" align="alignright" width="150" caption="Gold"][/caption]
During the recent stock market rally, it was easy for investors to get complacent about the future and engage in reckless speculation. The common refrain is that there is nothing much to fear except fear itself. After all, esteemed economics professors, including Paul Krugman, have ascertained that the worst is over.
Nevertheless, in the short term, the stock market rally is almost done. Window-dressing and opportunistic trading aside, we can expect a consolidation or downward correction. If you are sitting on cash, well, liquidity never hurts. If you are vested in blue-chips and getting attractive dividends, just maintain the status quo.
I won’t be looking at stocks for a while. Inaction is a decision too when it comes to safe investing. Of course, you can always add to your portoflio if you are a long-term investor. For the time being, I am keen to accumulate gold. We may still be in a deflationary environment but the impending inflation from all the printed money is no laughing matter.
As it is, we are damned if we store our cash under the mattress and damned if we don’t. Think of inflation as a silent tax which eats away at our wealth which have been accumulated painstakingly from investments and savings. The same amount of money will purchase lesser goods in future.
The Federal Reserve has lighted the fuse of hyperinflation with its intervention in the Treasury bonds market. While its Quantitative Easing through buying debt with printed money achieved a shock and awe effect in March, this weapon to control interest rates has become blunt after repeated use. Long term interest rates will find its own level according to supply and demand, not artificial intervention.
In fairness, the Fed has little choice but to intervene because if nobody wants to buy US debts, then interest rates have to rise to attract investors. The cost of borrowing will increase and add to the ballooning deficits. Thus, inflation is deemed the lesser of two evils especially when there are still strong deflationary pressures to counter.
Whether monetization of debt is indeed the best option for the Fed may be debatable but one thing is clear, it doesn’t generate real wealth. All these money created out of thin air only serves to transfer wealth from solvent savers to insolvent debtors who are greedy and irresponsible. This redistribution of money from current taxpayers (and our future generations) is tantamount to looting but because it is done subtly, public outrage is manageable.
Thanks to decades of over-consumption (fed by easy credit) and an entitlement mentality, America is in a rut hole and currently experiencing a harsh deleveraging process. Being a keen student of the Great Depression, Ben Bernanke is determined to get credit flowing again, induce more consumption and stabilize asset prices. And America is not alone, all over the world, trillions of dollars are being spent to reflate the economy. Read more...