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11.08.2010

The Federal Reserve Has Gone "All In"

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The Fed’s Gone “ALL IN”… Here’s What’s to Come
Well, it’s official, Ben Bernanke has officially gone “all in” regarding currency devaluation in the name of pumping the stock market. I have to admit, even though I knew this was going to happen, I’m still in shock. After all, it’s not every day that you see a superpower collapse and lose its reserve currency status courtesy of a deranged mad man.
Regardless of your feelings on the matter, these are the cards the Fed has dealt us, so rather than devote space to critiquing our insane and corrupt Fed Chairman, I thought it better to devote today’s article to detailing what is to come as a result of the Fed’s policies.
  1. QE 1 Failed, so Will QE 2= The Fed Doesn’t Have a Clue
  2. This is the most obvious, but most commentators seem to be missing it. We were all sold on QE 1 as being an emergency measure meant to keep the financial world afloat. Now we find out that the Fed considers this formerly emergency measure to be one of its normal tools (it’s not yet been a year since QE 1 ended and we’ve already got QE lite and QE 2).
    In plain terms, the Fed’s decision to implement QE 2 proves not only that QE 1 FAILED but that the Fed doesn’t really have a clue on how to fix the financial system. Bernanke is literally making it up as he goes, which is truly horrifying if you consider the implications of this.
    In light of this, you can bet that the Financial Crisis is nowhere near over. QE 1 failed. QE 2 will fails as well.
    Moreover, you can bet that additional, GREATER systemic risks will be playing out in the next year. The problems that caused the 2008 disaster are still out there. The only difference between now and back then is that we’re running out of band-aids to cover them up.
  3. Currency intervention, trade wars, and volatility will become the norm
  4. Currencies are relative, meaning their values move relative to each other (you can’t have the Euro, Yen AND Dollar go to ZERO at the same time). In light of this, the Fed has officially challenged the major currencies’ central banks to a game of “devaluation chicken.” Expect to see most world central banks, especially the Bank of Japan, European Central Bank, and China’s central bank engage in similar practices of their own. All of these guys have a choice, devalue or kill exports. They’ve all proven to choose the former time and again.
    Expect to see trade wars break out in a major way as this game progresses. We’ve already had a hint of this with China’s decision to cut rare earth elements exports. However, this is just the tip of the iceberg. Things are going to be getting very messy going forward. Expect to see capital controls, tariffs, and outright trade wars break out. As a result, prices of various goods will skyrocket (remember the rice scare in 2008?). Which brings me to the final point…
  5. Inflation is coming sooner rather than later
  6. The cost of just about everything is going to be going up… a LOT.  In fact it already has. Most commodity prices are up double digits in the last year. This is just the beginning. Combine currency devaluation with trade wars and you’ve got a recipe for MASSIVE spikes in the price of goods.
    In plain terms, the cost of living in the US will be going up sharply in the coming months. Oil is already at $86 a barrel. Food costs are rising. In fact, virtually everything but housing prices has risen in the last year. Forget future inflation, inflation is coming NOW. We’ve already seen the Dollar lost 15% of its value in the last six months.
    What will this do to a middle class whose savings have already been eviscerated by two stock Crashes, no private job growth, and a 37% decline in the US Dollar in the last ten years?
    Also, what will this do to corporate profits? Companies will either try to pass their increased costs off on consumers (good luck with that) OR will eat the costs themselves. Either way profit margins will shrink. I’m guessing the “stocks are cheap” crowd didn’t bother considering whether those future earnings projections were illusory.
The simplest forecast from this would be a portfolio emphasizing commodities particularly precious metals (GOLD and SILVER) and agriculture: the former will be the largest beneficiary of ongoing currency debasement while the latter is one of the few areas in the investment world where an argument for “value” can be made.
Stocks will also benefit from all of this in the near-term. But in the long-term look for pronounced weakness, particularly as trade wars and increased costs bite into profit margins.
Also, on a final note, it’s a good time to stockpile on food and other items that are sensitive to price increases.
I suggest having 3 months worth of supplies on hand at all times. The worst thing that can happen is everything turns out fine ...  and you eat the food anyway.