Content-Type: text/html Market Perceptions - The Effect of Unlimited QE
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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.


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.

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