Where Big Ben Tells Us To Invest…
The Dynamic Wealth Report
October 18, 2010
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.
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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.
• Nonferrous Metals Industry (Up 20%)
The commodities continue moving higher on increasing global demand. The
biggest industry move in the last month is in the Nonferrous Metals
industry. That group is being lead higher by companies supplying
Uranium, Lithium, and Zinc.
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