The mid-term elections are over. As predicted, the Republicans took over the House. It's no surprise that the markets are rallying stronger than they have in the last two years.
Job numbers in the US are looking better and support the outlook that a double dip is no longer in the picture. The Bush tax cuts are going to be extended. And the Bernanke crew is about to pump another trillion dollars into our markets.
The Federal Open Market Committee (FOMC) now intends to buy $600 billion of longer-term Treasuries through the end of the second quarter of 2011. It also plans to continue reinvesting principal payments from its current securities holdings, resulting in a package that could total $900 billion. This near trillion dollar stimulus is the central bank's latest attempt at lowering interest rates and creating inflation in order to bolster the country's sluggish economy.
So while many believe this is detrimental to the US in the long term and devalues the greenback (which it does), we couldn't be happier. You see, two of the most important factors that cause a rise in the price of commodities have occurred again, and in full force: Inducing inflation and printing money.
The Number One Asset Class
The announcement by the FOMC not only sent the S&P/TSX composite back to the levels reached right before the collapse of Lehman Brothers, but it sent practically every commodity's price up. Oil, gas, coffee, wheat, sugar, soybeans, lumber, oat, rice, copper, gold, and our favorite commodity of this year, silver, have all been climbing since the new trillion dollar plan.
With real estate in the US in shambles (see Get Ready for Another US Scandal) and overpriced in Canada, commodities are now the number one asset class to provide a hedge against future inflation.
For all of those contrarian gold and silver investors who continue to say that precious metals will not continue their climb, gold is now almost at $1400/oz and silver is about to crack the $27/oz barrier. Still need more evidence to change your mind?
Even Bernanke admits that commodity prices are rising and will continue to rise due to emerging markets with big players like China. While the stock market is a zero-sum game, the global economy is not and Bernanke and the US hope that these markets do well, saying, "There's no doubt a healthy Chinese economy is a good thing for the United States."
China continues to push out numbers that show they're not slowing down. The HSBC China manufacturing PMI (purchasing managers' index) from this past Monday made one of the biggest month-on-month rises since the data began back in 2004.
When you think of China, you immediately think of commodity prices and the PMI for China is the most closely followed index for its ability to judge metals and commodity prices. A strong Chinese PMI generally adds to a continued commodities bull market.
The Big Bang
The events of this past week are making our prediction of a strong junior resource sector bull market come true (see The Next Big Boom). The stocks in our Equedia portfolio have been flying. Minco Silver (OTCQX:MISVF) shot past $5 this past week - a near double for those involved since our first Special Report Edition on the Company (see Brink of Milestone).
The fact is, Bernanke and the US government are spending to stimulate the stock market. They know that higher stock prices will encourage people to spend more and businesses to invest more. Combine that with low interest rates and a weak greenback, and U.S. exports become more attractive to foreigners; they're spending to rebuild the US.
Whether they are doing it the right way or not, it doesn't matter. Like it or not, capital markets exist so that investors can create capital for corporations. The lowered interest rates and higher equity prices as a result of stimulus, quantitative easing, government spending, or whatever you want to call it, ultimately generate more capital for corporate investments which leads to economic growth through job creation and innovation.
Real estate won't get us out of this jam like it did in 2005...the stock market will.
As Mr. Bernanke said himself, "This approach eased financial conditions in the past and, so far, looks to be effective again. Stock prices rose and long-term interest rates fell when investors began to anticipate in the most recent action. Easier financial conditions will promote economic growth..."
We can't predict the future, but we do know the US won't let the world see the trillions of dollars in stimulus go to waste. That means they're not going to let the market fall and will do whatever they can to protect it. They proved it again this week.
There's no arguing that the stock market is the modern way of life for our global economy. If the North American stock market collapses again, it means the US has failed. The US won't let that happen.
So is the stock market overvalued? Maybe. But that doesn't mean it's a bad thing.
While we have been investing heavily in the junior resource space and have made some incredibly happy profits, we're not going to let this commodities boom go by without doubling down.
We may sound like a broken record, but we have entered the stages of an amazing bull market run for the junior resource sector (see The Breakout).
If you're an investor, the next 12 months have the potential to yield some very significant results.
The Time is Now
Institutions and funds that were once sitting on the sidelines (The Retail Advantage), are now coming back into the markets. As mentioned in past newsletters, when this happens, the junior resource sector will thrive and we will see a strong junior bull market.
Get ready, money is on its way...