If anyone was still wondering whether additional stimulus would help the stock market, the action of the last two days answers the question. The Minutes of the Federal Reserve’s closed-door meeting released on Tuesday showed that several members favored a “more substantial move” at the Aug. 9 meeting, in addition to the promise to keep rates at record lows for at least the next two years. Investors celebrated by uncorking the champagne early in anticipation of further Quantitative Easing, turning stocks on a dime and sending the market higher. Keep in mind however, that a successful test of the August 8th lows is critical to keep the uptrend intact.
I have been making the case that the economy is crippled for some time now, as most of what was forecasted in my new book, Facing Goliath: How to Triumph in the Dangerous Market Ahead, is rapidly coming true. With unemployment remaining stubbornly high and spending hampered by our massively over-indebted and swiftly aging population, they will feel forced to act. The market is addicted to the stimulus, and acts the same as Viagra which I discuss in the Great Viagra Market. The recent rally on the release of this news simply confirms this.
As I announced on my CNBC appearance just yesterday, the Fed is adding a day to their next meeting to try and convince the few dissenters to play along. Although hard for many to believe, there are still several more tools available to them, such as:
- - Simply buying more bonds as they did with QE2
- - Replacing the shorter term Treasuries in their almost $2 trillion portfolio with longer term bonds in an effort to lower rates even further including mortgages and consumer loans
- - Lower the 0.25 percent interest rate it pays banks on the $1.6 trillion in excess reserves they keep at the central bank to encourage them to increase lending to consumers and companies.
- - It also could pledge to continue with QE Mini-Me and keep its balance sheet near a record $2.86 trillion for an “extended period” or for a specific time.
In the end, this will do nothing but extend the agony. Japan has tried all of this already to no avail. As John Mauldin recently stated,
“Since 1945, all recessions have been business cycle recessions. We are now in a deleveraging recession for which we have no modern analogs, except Japan. Yet we are applying the same methodology (massive debt and deficits along with zero interest rates) that did not work there, and will soon bring Japan to ruin.”
This is spelled out in Mr. Mauldin’s new book Endgame: The End of the Debt Supercycle and How It Changes Everything, which I strongly recommend reading.
The one good thing it will do, is push the stock market higher, albeit temporarily. The Fed may say publicly that they hope to add jobs with more stimulus, but all they really can hope for is the wealth effect, whereby people with money “feel” richer and therefore spend more. If there is doubt of this, just take a look at some of the luxury retailers such as Tiffany’s, which has skyrocketed in the last year. This gives investors an opportunity to turn crises into opportunity.
As my friend Tom likes to say, “never let a good crises go to waste”, however, the key is to do so by getting the very best return with the least amount of risk possible. Investors should focus on the sweet spot in the market and try to avoid the “all in or all out” mentality of investments that simply track the stock market. Right now that sweet spot is dividend stocks, MLPs, preferreds and corporate bonds, currently in the 8-10+% range.
Risk management is the key. During the last crises the market fell over -50% and millions of investors lost that and more. With that you need a gain of +100% just to break even. That’s how the last 10 years or so became the lost decade. In contrast, if you were able to keep the losses to just 10%, you would only need an 11% gain. So after the next crash, which is not that far away, and the market does rally that 100%, while everyone else is just happy to get away from that roller coaster where they started, you are ahead of the game by +70%. And that will come with a lot less heart attacks, sleepless nights and broken marriages.
And that’s where I can help. Our active hands-on approach to managing portfolios can help you manage risk and deliver returns. Call me for a free consultation today at (916) 925-8900.