What a day.  Checking in on the markets around noon Central time, I was wondering if we’d seen the top of the bear market rally. There wasn’t much positive price action in the equities I’ve been watching, and gold (GLD: chart, web, Y!) wasn’t making any great shakes either.

Then Bernanke went on a shopping spree.

When I checked back in around the close, nearly everything I was watching not only reversed course, but went into overdrive.

The Fed committed to buying up to $300 billion in long-term Treasurys over the course of the next six months, as well as nearly double the purchasing power of mortgage-backed securities guaranteed by Fannie Mae and Freddie Mac, totaling $1.25 trillion (remember, trillion is the new billion).

To top it all off, the Fed also doubled the amount of debt it committed to purchase from the inept mortgage lenders.

Effectively, this action is much akin to chopping interest rates even further; when you’ve hit bottom on the interest rates, the next best thing to do is buy the debt.  In a round about way, this increases the leverage on the banks side allowing them to borrow money at an even deeper discount.

Corner Office Comments

While all this sounds good on paper, and the market surely agrees, long term I’m not convinced this move was well thought out.  What is the Fed going to do with all this debt in the long term?  There was no exit strategy revealed.

Further more, anyone holding long term debt when inflation kicks in is going to get chewed up and spit out like something rotten.  The Fed included.  As the value of the dollar decreases, as readers of this blog remember I’m laying a significant amount of chips on some massive inflation, it’s going to take more of those dollars to service the debt the Fed is absorbing.  The fact that gold and petroleum products rallied on the Fed statement seems to reinforce that position.

This move seems to spread much of the financial strain in localized sectors of the economy, more broadly the financial sector, further out over the entire economy.  No longer are nearly worthless mortgage backed securities held by Fannie or Freddie, they’re held by the entire populous of the country (you and me).

From my standpoint Bernanke is throwing up his arms and wiping bad assets of public companies balance sheets, letting them start over, and forcing you and I to eat the bad tasting financial slop.  Things will look rosy for a while, until inflation starts creeping into play and the government will need to print even more money to service the debt.

Any further upside to this rally should be used to capitalize on gains and readjust into a hedge against inflation, in my opinion.

Economics, Finance bernanke, Economics, Fed, Inflation, treasury

I can’t help but think that with all the money the Government is dumping into the economy, particularly money we don’t have and must borrow or print, that our country is due for some serious inflation in the somewhat near future.  You can’t dump trillions of extra dollars into an economy and expect the value of the dollar compared to the cost of goods to stay the same.

So, in my macro-economic scope, if this is what’s coming, how can I capitalize on it?

If you believe that inflation in our country is around the corner, where can you put money to either hedge against the negative trend, or perhaps increase your return?  To answer that question, you have to understand what inflation really is in order to know where to funnel your money.

What Does Inflation Mean?

Inflation is the rate at which the general cost of goods and services compares to purchasing power for those goods and services.  For instance, if the value of the dollar goes down and the intrinsic value of, say, toilet paper stays the same, it will take more dollars to buy toilet paper with rising inflation.

There are lots of things that could devalue the almighty dollar, and directly diluting the value by printing more money is one of them.  If you put it in investment terms, it’s a bit like diluting stock by printing more shares to raise capital.

To be certain, sometimes diluting stock or currency can be a good thing so long as the return on that money is greater than the cost of borrowing the money in the first place.

So how do I hedge against inflation?

Gold.

Gold has been the time-tested and preferred hedge against inflation when markets panic and governments try to “help”.  The reason?  Gold is the universal currency that holds its own value.  Sure, it’s valued in US Dollars on the open market, but since its accepted as a form of payment around the globe, the real value of the precious metal precedes the US currency.

Read more…

Economics, Investing crude oil, GLD, hedge, Inflation, investment, TIPS, treasury

It’s too bad a cartoon has more financial sense than our U.S. Government.

“That’s exactly what I’m afraid of.  Easy money.”

Economics, Finance Finance, Inflation, monetary policy, Money