Market Perceptions - The Effect of Unlimited QE

Market Perceptions - The Effect of Unlimited QE

Updated: 2012-09-22 10:15:06

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Looking Back a Year

I would like to reference a post I made back in August of 2011, prior to providing my update. I still stand by those words, 1 year later.

Slower Economic Growth or Higher Commodity Prices? Take your pick. Monster stagflation is here.

Summary

To summarize the previous link, the world demands more commodities (milk, silver, oil, etc.) every year due to growth (industrialization of weaker nations and global population increases). This requires commodities to become more expensive. Since more is needed, people are willing to pay more to get what they need, and prices rise. Stimulus measures only worsen this issue, because it increases the need without increasing efficiency.

To better explain, people do not enrich the economy over the long haul because they receive free money from the government. People enrich the economy through genius. For example, they come up with a new way to reduce oil costs. (Edison said, "Genius is 99% perspiration and 1% inspiration," by the way.)

Some people may actually put free government money to good use, true. However, genius is rare, and there is a high likelihood that the money will be extremely wasted. We have already seen this with failed government projects such as Solyndra. Wealth needs to be created by geniuses - not the government. We have seen this time and time again with giants such as Microsoft, Apple, Ford, Phillips Petroleum, etc. These were not always giants. They began as an idea in a brilliant man's mind.

Looking Forward

The government, specifically The Federal Reserve, has announced it will begin unlimited QE starting this month (there is no time limit). This is great news for anyone with stocks or commodities. However, that reward is a mixed bag because it is not good news for the economy. Higher copper prices are not good for the economy. Higher corn prices are not either. Neither are higher oil costs. By raising demand artificially, we will once again weaken our economy.

Therefore, I see difficulties ahead. Our economy will begin to kick into high gear again, but as stated in my article from 2011, we will hit the ceiling of high commodities costs and fall again into stagnation.

This means primarily one of two things.

1. Our government will keep giving away free money in the attempt to prevent the stagnation. This will cause all costs to become extremely higher.

2. Our economy better produce a swath of geniuses - quickly.

If most of your savings is in cash, CDs, savings accounts, or treasuries earning <1% interest, higher costs will erode your wealth, as the U.S. dollar's spending power also erodes. I recommend you reconsider what you are doing with your money.

I am primarily investing in silver, mines, oil, natural gas, and high growth stocks (near a 52 week low, low debt, high cash, and high return on assets).

Here are some things to consider, as we revisit this article down the road.

Silver was $28 about 1.5 (8/15-8/16ish) months ago. It is now $34. (21% gain)

Gold was $1602 and is now $1773. (10% gain)

Copper was $3.35 and is now $3.77. (12% gain)

Oil (WTI) was $94 and is now $93. (1.1% loss)

Natural gas was $2.77 and is now $2.90. (4.6% gain)

The S&P 500 was 1405 and is now 1460. (3.8% gain)

The most obvious thing in the above numbers is that silver, gold, and copper gained substantially MORE value than stocks and oil. The divergence in oil is very curious. However, I am not surprised by the lag in stocks.

Companies must face the battle ahead of higher commodity prices. On top of that, there is high speculation that the stock market will take a large hit if the Democratic Party retains the presidency. This is fairly typical speculation, but it primarily is rooted this time in the increase in taxes that will occur next year and the dramatic cut in defensive spending.

If the market takes a hit, I will be buying hand over fist. On a side note, this nation, historically, cuts defense spending for a while. Though, usually something wild happens in the world that scares everyone into spending big on defense again. Therefore, when defensive stocks bottom, I will be buying them hand over fist as well.

Showing Thought(s) 1 - 3 of 3 Next Comments

how to turn dependency to oppotunity seeking created by Anonymous Shadow on 2012-09-24 07:52:07

To me, the deeper question is how to help redirect the dependant into opportunity seekers. Growth comes from need that causes us to look for solution. The government money is an easy "opportunity" to fill a need. The problem with easy government money is that is squelches the natural drive. Survival is a strong motivator. How do we encourage need fulfillment in our society in a such a way that causes people to look for innovative solutions that are free enterprise based rather than QE rescue me based? Making it easier for opportunity to turn to revenue generating, life sustaining endeavors? The economy, on a Micro level, has much opportunity. I don't have the answer, but, having the experience over the last 20 years of starting a couple of simple businesses, and having no college education, I know it is possible.

I'll start with one. Large corporations have a tendency, similar to "big government", to become inefficient in some of their ancillary, non-core endeavors. Those necessary, but non-core areas are ripe with opportunity for the individual American with is willing to take a risk and think "outside the box". The auto industry, as an example, has numerous "spin-off" sub industries where an individual can start and operate their own business, providing those ancillary services/products that serve the core of the Large corporation....and that is the key, or one key, "service", or more specifically, being willing to be "used" as a "servant", subsidiary to the main. This usually takes some skill or expertise and that may lead to a whole other discussion, but, I have found there are many opportunities for anyone with a skill set. It takes a creative approach to break out of the mold of the "job" mentality, though. And, it is scary, at first. But once the business starts working and the money is coming, it is pretty amazing. For me, this is where "faith" comes into the picture. And, that would be a whole other discussion in itself.

-rwhit

Excellent points spoken from experience created by cloudHopper on 2012-09-25 21:30:20

These are excellent points. Essentially what you are saying is that we need more people to find the niches big companies are not filling (I can think of one in particular). Then, people need to fill those niches, and while filling them, they will need to rely on their faith in God to see them through the challenges in the early days or the rough patches.

Excellent thought. It is almost like we need someone devoted to finding good niches for people to fill... I will need to think about that one.

More Thoughts created by cloudHopper on 2012-09-29 12:16:03

After thinking about this more, I believe that there are different hats God gives for everyone to wear.

For instance, there are idea men. I know one idea man, in particular, and I believe I am beginning to understand how to identify idea men. However, I will restrict that knowledge to one-on-one conversation, as I believe it is very important knowledge that I do not just want to give away. Nevertheless, the point of bringing it up is to emphasize three things.

1. God gives certain hats to people for them to wear.

2. One person's hat is to be creative and come up with new ideas.

3. Another person's hat may be to actually identify the different types of people to best understand how they can all fit together to create incredible, God-infused synergy.

The last point I want to make is this (and I think we all know this one):

4. Sometimes God allows us to wear multiple hats. Regardless, some individuals tend to sparkle with their God-given talent more than others, and this is incredibly important to recognize for the overall puzzle that must be created.

So, to summarize my thought, the idea men are incredibly important. They are one of the most important parts of the puzzle. They help to begin the creation of the puzzle. Even though they may not do much of the work to put all of the puzzle pieces together, they are amazingly important. When you find them, it seems highly preferable to do whatever is possible to keep them loyal to a combined future.