Print More Money!
Research for Online Investors

by John Dalt

8/02/10

The market is up this morning acting like we might push through resistance this week.  We haven’t seen 1148 since 5/18.  Retail investors and traders are ignoring any bad news and jumping on the band wagon.  Smart money seems to be setting on the side, watching.  Shorts are taking it in the...shorts.

Last week the St. Louis Federal Reserve President James Bullard said the potential for growth in the U.S. economy is somewhat slower than two to three years ago.  His comments came after the U.S. recorded GDP growth of 2.4% in the second quarter, down from 3.7% in the first quarter.

Bullard has been a voice for the Fed to start tightening money with higher interest rates to avoid inflation.  In an about face, he said the best course going forward may be for the Fed to revive the treasury purchase program to avoid deflation.

Bullard referred to the danger of the U.S. falling into a deflationary trap like Japan did in the 90’s that led to the “lost decade” that continues to haunt that country. Bullard noted that core CPI inflation is under 1% and after the second quarter GDP numbers said, “We need to think about what we’re going to do if we get further negative shocks.”

Inflation protected securities (TIPS) are currently pricing inflation at 1.4%, they were over 2% earlier this year.  Bullard said, “If those continue to drift down and actual inflation continues to drift down, we could get into a sticky situation here (U.S.).”

Bullard is concerned that the Fed’s language concerning low interest rates for “an extended period of time” may actually backfire and cause the economy to stall and experience low or negative growth.  This would lead the U.S. down the same road as Japan.  He believes the Fed could forestall this scenario by pushing more money into the financial system through quantitative easing.

Bullard changing to voice his sentiment to restart quantitative easing is no small matter. The Fed has been rock solid on the strategy of keeping interest rates low, but ended the purchase of Treasuries in the first quarter, and mortgage backed securities (MBS) at the end of 2009.  Now it appears we are moving back to the “inflation trade.”

We had gradually readjusted our thinking on the macro trends affecting the market.  Deflation or the chance thereof, had made us take a more defensive stand.  We were anticipating a sell-off of precious metals as traders were discouraged waiting on inflation to push the prices higher.  Deflation and slow growth meant a strong dollar, this was a danger to U.S. companies with overseas operations as the repatriation of profits would suffer from currency exchange rates.

Now we have to reexamine every investment and reason we like it in light of what may happen at the next Federal Open Market Committee (FOMC) meeting. The Fed governors meet next week, and the statement on Tuesday could signal a significant change in the market operations of the Federal Reserve.

The FOMC statement always moves the market, as traders parse the words concerning the Fed’s economic outlook and intentions going forward. We believe next week’s statement could be a ‘game changer’ when the Fed commits to "Print More Money."

Today’s Quote:
The great enemy of the truth is very often not the lie - deliberate, contrived and dishonest - but the myth - persistent, persuasive and unrealistic.-John F. Kennedy, Yale Commencement address 1962

Editors note:  We don’t believe “Inflation” is a lie or a myth.  We just don’t know the timing.  The truth may be a stagnate economy waiting for political backlash to the world improvers taxing, regulating and spending our country into a ditch.  The return to a free market would do more to lift our economy out of the doldrums than all the ‘planning’ in Washington.

The information presented in this newsletter is based on generally available news releases, corporate filings, current events, interviews and the editor’s opinions.  It may contain errors and you should not make investment decisions based solely on what you believe you have read here.  Do your own research, it is your money.  If you lose it, it is your responsibility, not ours or your grandmothers!  The editor may or may not have a position in any securities discussed.  The editor may have held a position in a security earlier, or in the future.

MarketToday Home Page

Back to Top