-It’s time to prepare for the inevitable!

Investors breathed a sigh of relief when Bernanke said the Federal Reserve would continue with an easier quantitative easing program by continuing to reinvest the interest and proceeds of the existing bonds in the Fed’s portfolio, essentially QE Mini-Me. Although this won’t be the flood of $110 Billion in stimulus per month, it will still add about $30 billion which is still music to traders ears.

Since March of 2009, when the QE programs began, there has been an 88% correlation between the QE programs and the rise in the stock market. When money comes in, stocks rise. When they test ended QE1 last year, stocks plunged. The stock market is rigged to government stimulus, and that’s what is driving the market higher. This isn’t a hypothesis. Helicopter Ben readily admits it… and when the time comes you better know where and how to run for cover!

Unfortunately, what Ben Bernanke and his financial puppeteers at the Fed are soon to realize (or finally admit) is that the entire stimulus program is failing. I mean come on folks, 1.8% GDP last quarter after $14 Trillion in stimulus? Add that to rising inflation, which is currently at 2.8%, and it doesn’t take a math whiz to figure out that this is a bad deal! This won’t stop them though, they will feel forced to bring forth a full scale QE program, whether it’s called QE3 or a horse with a different name.Then be ready for a QE 4 to get us through the election.

To add insult to injury, each new program has diminishing effects, where we generate less and less benefit each time we do it. it is said that for every dollar spent in stimulus, the first round gets you about 80 cents in benefits, the 2^nd about 50-60 cents, the 3^rd about 30 cents and so on. Considering that this is not coming from the nations cash reserves but new DEBT, this is clearly unsustainable and we are not far from critical mass.

Although I don’t believe the market crumbles right here, right now, investors must begin to prepare for the inevitable. Stocks trade on earnings and earnings have been good. With earning’s season almost over, we’ll likely see a shallow correction, followed by the anticipation of great earnings expectations next quarter. However, bull markets rise on positive earnings “surprises”, and there just aren’t that many surprises left in this market. After all, how many times can you take someone to the same restaurant every year on their birthday for a surprise party before they figure it out?

Worse yet is that complacency is on the rise as I see more and more people ignoring the risks because their portfolios have been looking better. I’ve only seen this a handful of times in my 27+ years in the business: 1987, 2000 and 2008. Although we are not at those extreme levels, the level is rising. Investors must realize that buy-and-hold (buy-and-hope) is dead. If you think that the stock market can’t or won’t, give back 40-50% again, you’re dreaming. It is just a matter of time when summer 2008 happens again. Maybe not the exact same way, but any way will devastate the unprepared. There are plenty of ways to make money in this market without all the risk, and that’s what we like to do. Don’t wait until it’s too late.

… And that’s where we can help. Our active, hands-on Top-Down Tactical™ investment management strategy for managing portfolios can help you manage risk and deliver returns. If you would like to discuss the market, economy or simply get a free second opinion on your portfolio, call me for a free consultation today at (916) 925-8900.

A Word on the Dollar:
By far the biggest question I’m getting lately is not if but when the US dollar is going to fail. My response is simply to stop reading those schlock shock newsletter writers trying to sell their wares. The dollar is fine. It is just about where it was before the crises. The Fed is keeping the dollar down to try to increase exports so they can grow their way out of the deficit. It is the world’s reserve currency, and will remain such for many years to come. The Euro is in worse shape than ours and China’s economy is less than a third the size of the U.S. When the Fed stops deficit spending, it will strengthen. And, when the next crises emerges, it will very likely be the safe haven place to be just like it was in the last.

… And Another Word On Inflation:
On this I actually agree with Bernanke. There is no core inflation. Inflation comes from wage increases and asset (real estate) appreciation, and we have neither. I am very well aware that food and energy prices are skyrocketing, but it is primarily caused by the Fed’s stimulus policies, and is transitory. I explain this phenomenon in The Great Pharaohs Rebellion. This is clearly evidenced in that just today, the 12-month T-Bill traded to a record low 0.173%. Other treasury maturities are also well off of their lows. This is predicting an economic slowdown. The Fed’s printing of money is not generating inflation because it is not increasing the money supply. Currently the nation is deleveraging, or trying to if only the Fed would get out of the way, and assets are being destroyed faster than the government can inflate. Deflation is the real likely scenario.

Regards – Keith