Central Banks Are Quickly Moving To Destroy Countries' And People's Wealth -- You Should Move Even Quicker To Preserve Yours
Contrary to what I had predicted, the Fed made a dramatic and truly destructive move this week - much sooner than could be reasonably expected.
The markets were near all time highs. The US economy has been in an officially not too bad shape (although the reality is obviously very dark). More importantly, food and gas prices were already extremely high, hurting pretty much everyone. Plus, the US election is coming and one would think that the last thing that would help Obama to get reelected would be more inflation and a consequent faster impoverishment of the ordinary American citizen. Still, the Fed announced this week something stronger than QE3 - it went for actual infinite QE, as it decided to continue Operation Twist, maintain its zero interest ZIRP policy, and also to buy US$40 billion of mortgage backed-securities every month.
These measures are supposed to last for the next years, which means that, in only about a year from now, by the end of 2013, the Fed will have created more than 1 Trillion dollars with its new QE program, expanding its balance sheet to around 4 Trillion Dollars. And that is if they do not put extra steam into this new endless QE during next year. Furthermore, how will the Fed's balance sheet be by the end of 2014 or 2015?
I thought that the Fed would wait until they saw a lot more pain in the markets before going for QE, but it did not happen. And this has to make us wonder: What does the Fed know that we all don't? How seriously bad must the situation already be for the Fed to take such an aggressive and desperate step?
Of course this was a political move. But it was an inverse one. One would think - I certainly thought that - that going for QE3 before the US election would not help Obama get reelected, as QE would only hurt the US economy and send the prices of food, gas and all commodities even higher - thus impoverishing American citizens, and not just them, actually (the Arab spring was caused by the increase of food prices around the world, resulting from QE2). Plus, the Fed's interventions have become so polemic, that one had to think that they would only step in once again, in a very aggressive way, once a bloodbath on the markets would take place and would help to sort of 'justify' it. However, it is clear that Mr Bernanke and Mr Obama thought differently.
Be as it may, it is pointless to try to understand central bankers and politicians. What is more important is what this means and what will the consequences of it be - and even more how you can and should protect yourself from the wealth destruction that the Fed, the US Government, the ECB, the Eurozone, the Bank of England, the Bank of Japan, the Swiss National Bank and others are producing.
The markets just got even more dangerous and difficult to understand, as they have never been as manipulated by central planners as they are now, the economies are not functioning in a free and healthy way, and the wealth of ordinary people, their salaries and their savings, will just get more strongly and quickly destroyed. More countries, not just people and companies, will go down as a result of all this mess that is being caused by the Bernankes of the world.
Let us understand it better.
First of all, this infinite QE is nothing more than yet another bailout of banks, as the Fed will be buying their troubled mortgage backed securities. That means that banks were even in more trouble and facing even more serious risks than we all thought - that is, I believe, why the Fed has stepped in so boldly and so soon. So, you should definitely limit your exposure to banks as much as possible, and especially to American and European banks, which are over-leveraged and have a lot of toxic assets in their balance sheets.
Secondly, just as it happened with QE1, QE2 and Operation Twist in the US, and as it happened with all the ECB emergency measures, namely LTRO1 and LTRO2, the US and the European economies will again not get better with central bank intervention. These past interventions did not even control unemployment, let alone decrease it, and they have not actually stimulated consumption or any actual economic activity. On the contrary, they have raised the inflationary pressures, which reduce consumption and hurt the activities of companies, as their operational costs rise.
Also, in Europe, the banks that have resorted to LTRO1 and LTRO2 have also suffered in the markets exactly because they did so. It should also be said that, while inflation can raise the price of stocks, it will also eat away their earnings real value, and it will also probably bring them down, as it weighs on company's operational costs, reducing profit margins. So, the only thing one can expect from these steps is further deterioration of the economy and even higher unemployment - real unemployment, not just the officially reported unemployment, which does not fully reflect the reality, but is, in actual fact, already extremely high.
Thirdly, this QE-infinity paves the road for hyper-inflation and means a true wealth transfer. The banks and the super-rich get the cheap money first, and the ordinary people see their money lose worth secondly. The only reason why we still do not have hyper-inflation is because banks are getting this cheap money from the central banks and are not making it available for the real economy - they just sit on it and are actually paid for keeping it.
However, this tremendous money creation, in which not only the US and the Eurozone, but also the UK, Switzerland, Japan and China, among others, have been engaged, can only have their inflationary effects kept relatively restrained for some time. The currency wars that have been going on in the world are just far too global and enormous to keep things under control for long. This means that whoever holds fiat currencies - and especially those which are more dangerous, such as the USD, EUR, GBP, JPY and CHF - gets poorer and poorer in this big wealth transfer.
Finally, as for Europe and the Euro, all you have is just more wood being thrown into the fire - which is already clearly out of control. Greece is a mess and will default. Portugal is a mess and will eventually default. Spain is a mess and will certainly default. Italy is a mess and will go the same way. France is using its last bullets to kick the wealthy away and destroy what remains of its economy, so it is self-destructing. And Germany is already not growing quickly and strongly enough, while it is taking on dramatically gigantic financial obligations that it will need to pay for due to the constant Eurozone bailouts.
Plus, the German Constitutional Court ruling, along with the relative positive reaction of the German government to the ECB's announced unlimited bond-buying program, have only added more nails to Germany's (and to the Eurozone's) coffin. The Euro just got even more worthless and, one way or another, the Eurozone countries are heading to an economic and financial collapse which will be like nothing we have ever seen before.
Here is how you can invest your assets in order to preserve, and actually expand, your wealth, and how you can trade in face of these moves.
1. The first thing you should make sure you take care of is building a true fortress-portfolio outside of the financial markets. You should buy and safely (and discretely) store (hiding it from thieves and from governments) physical Gold and Silver. You should buy fertile farmland with water and have it cultivated, both to get appreciation for your farmland as an investment and as an inflation hedge, to generate cash-flow from the cash crops cultivated there, and also to provide a constant, reliable and independent source of food for you and your family. You should diversify the geographic, political and economic exposure of your assets and you should preserve some liquidity - including holding cash in your hands - in several currencies. You should also store food, water and have a solid plan for you and your family to be safe when things start to go seriously wrong.
2. In the short-term, and when it comes to trading and investing in the financial markets, you should:
i) Short the EUR, by going long the EUO, which is an ETF which acts as a short on the Euro. Remember: the fundamentals of a worthless Euro remain in place, its current rally is more based on hysteria with ECB and German Top Court decisions than on actual positive solutions being implemented to save the currency and the Eurozone, and the EUR is also high because the USD went down due to the Fed's decision. Yes, the USD is almost as worthless as the EUR but it is a bit less endangered than the Eurozone currency. Plus, when the panic returns to the Eurozone (and it will soon because Portugal and Greece are going down very fastly and Spain, which is in a dire situation, is sinking into depression by the day and is resisting an ECB bailout because it knows that it will only make it sink in a faster way), the EUR will go down again and who knows how low it can go. The ECB´s decisions and the German Top Court ruling are only bearish for the Euro, so, with the EUR now at the 1.31 level, I believe it is an outstanding short.
ii) Short German Bunds. Short the BUNL - an ETF which keeps track of the German Bonds, which continue to be in a bubble. These, after the ECB's decision, with the subsequent support of the German's government to it, and after the German Constitutional Court's ruling, just became an even better short. If you do the math, you will see that there is simply no way by which Germany can sustainably pay for all the bailout bills it is taking and that it should already be paying a lot more interest for its bonds than it is.
iii) With the latest Fed move, this marks the end of "cheap" Gold, Silver, Oil and commodities in general.
Go long Oil, buying the USO, USL and or BNO ETFs. I believe that, due to inflation pressures, the Peak Oil factor and a coming conflict with Iran (I would view it as likely after the US election, but, after the Fed moving in such a quick way, I actually think it can come earlier), Oil is close to be trading at $150, at least. This is your chance to win money from Oil instead of being crushed by the rise in this commodity's price.
Go long Agricultural Commodities, namely Wheat, Soy, Rice and Corn. I have said it before and I say it again. As the world population just keeps growing and putting pressure on the demand for food, and with Wheat, Soy, Rice and Corn being extremely important ingredients of so much of the food that people eat (along with other uses they have, namely for Energy), these make strategic investments that can be a hedge against the food crisis, as much as an outstanding opportunity to make the most of your investable Dollars, Euros, Pounds or whatever fiat currency you have. Remember: the inflationary pressure has also its effects on food and helps to bring the prices of these commodities up, along with the increase in demand for these goods and the foreseeable food crisis that is nearer and nearer, and that the very UN is loudly speaking of. Moreover, with the abrupt climate changes which have been putting, and will certainly continue to put, even more pressure on the prices of these commodities, as was the case with the drought in the US and how it affected the corn crops, all indicators point to higher agricultural commodities prices. So, I would go long Wheat, Soy, Rice and Corn through the futures market ideally. I would nevertheless certainly see it as a good option to buy ETFs that keep track of these commodities, such as JJG, CORN and SOYB, for those who do not want to trade futures.
Finally, remember that you should only invest a part of your assets in the financial markets and keep most of them not exposed to this sector. The risks are far too high, so it is absolutely crucial to keep most of your assets invested in the right way outside of the financial world. Also, make sure that the stock brokerage company that you are using to trade does not have a very high absolute leverage ratio, in order for you to reduce your exposure to this counterpart risk. Remember: over-leveraged banks and brokerage firms are dangerous for your money, so you should want to avoid those, in order to reduce risks while trading.