While anxiously watching the last episodes of Breaking Bad, I was struck by a very interesting comparison: Ben Bernanke is Walter White. Both create and control two of the most highly addictive substances ever known to mankind. Walter White, the highest quality blue Methamphetamine and Ben Bernanke the green US dollar, the reserve currency of the world. Is this comparison a coincidence? I think not. After all, the end results are the same. In both cases the user becomes more and more addicted, while the recovery is painful and destructive.
In past articles I have referred to the Fed's stimulus programs as both crack and Viagra in the Great Viagra Market. Very simply, our economy and stock market have become addicted to continued monetary stimulus. Bernanke has been controlling the economy in two ways: through $85 billion a month in bond purchases by printing money out of thin air, and by record low interest rates well below that of inflation, with the Fed Funds rate hovering at 0%. Just like with what happens on crack or Viagra, it's all good while the chemical is in your blood stream, but absolutely no fun when it wears off.
Much like the message we see in the series season-end trailers that, "all bad things must come to an end," neither Walter nor Ben are long for this world. Once the QE stops, our fate will be on a similar crash course. If Bernanke had only demanded that congress say his name... "Heisenberg!" I will admit that I dread the end of the Federal Reserve's stimulus programs almost as much as I do the end to Breaking Bad.
We must all remember that QE is only a temporary remedy to the nation's economic ills and is still subject to the basic laws of diminishing returns. QE1 brought the economy from the brink of death moving GDP from -1/2% to +3%. By 2011 growth had retreated to -1.3% again. This was the first cycle, which showed 4 quarters up and 3 down.
By mid-2012 another economic Viagra was needed, which quickly brought growth up over 4% only to be followed by an equally fast drop to .14%, once again another 7 quarter cycle. By mid-2012 more was needed which ushered in QE3, which is expected to push GDP up to 3-4% by the 4th quarter of 2013. If the trend again proves right, we'll be looking at a numbing 0%-.5% by mid next year... all at a time when stimulus is waning without the possibility of an increase. This is the Goliath I write about in Facing Goliath - How to Triumph in the Dangerous Market Ahead.
The Bottom Line
At the very least, the Fed is done increasing its stimulus programs, even if they are not quote ready to taper as Ben has recently told us. This increases the risks for investors exponentially, as the bigger the bubble grows, the bigger the bust will be. The 4th quarter will likely be strong, provided investors do not look too far out.
The closest comparison we have to our situation is Japan. Since the Japanese bubble burst, they have not had a recovery last more than 4 ½ years. Moreover, since 1950 the US has not seen a bull market more than 5 years. Clearly the clock is ticking.
The critical element for investors is to ensure that your finances are properly aligned with your retirement goals and dreams. If you are comfortable taking risks, make sure you are getting the best returns with the least risk possible. However more importantly, if you do not need to take the risk, don't take it. I have found that far and away, too many people take more risk than they need to, want to, or even think that they are. Not only are there ways to make money in any market, there are strategies to protect you in the inevitable next decline.
With no taper on the horizon expect a stronger market ahead. Growth investors can load up on technology where innovative business and personal solutions will lead to greater efficiencies for years to come. Investors who can withstand volatility with a big potential reward can buy Apple (AAPL), which just brought out its new line of goods: Google (GOOG), which has a new "Glass" product, which is already been improved, that will revolutionize the communications market, and the periphery companies that support these new innovative developments such as Intel Corporation (INTC), Qualcomm (QCOM), Microsoft (MSFT), Cisco Systems (CSCO) and VMware Inc. (VMW). For a more diversified approach, buy the broad market ETFs like the SPDR S&P 500 (SPY), PowerShares QQQ Trust Series 1 (QQQ) and iShares Russell 2000 (IWM).
Gold and silver have had a little resurgence with the Fed's announcement, but I am still wary and would sell the metals, such as the SPDR Gold Shares (GLD), PowerShares or Market Vectors Gold Miners ETF (GDX) on any strength.