Investment Contrarians

inflation


Best Investment Strategies to Battle Coming Inflation

By for Investment Contrarians | Dec 9, 2013

Best and Worst Investment StrategiesThe S&P 500 may be entering bubble-like territory: that’s what I’ve been writing for the past few months.

Now, it appears as though I’m not the only one who’s worried about asset classes beginning to form bubbles from the excess money printing. 2013 Nobel Prize-winner Robert Shiller also recently stated that he is concerned that prices have risen far too quickly across many asset classes, from real estate to stocks.

As I’ve written several times over the past couple of months, investing in stocks at these elevated levels is quite risky. My belief is that much of the upward move in the S&P 500 has been primarily based on the liquidity (money printing) being pumped by the Federal Reserve.

Investing in stocks with this premise can only work for the very short-term trader who’s quick enough to get out when the tide begins to turn.

Because people are not investing in stocks based on actual fundamentals right now, one can’t expect the value in the S&P 500 to remain elevated once there’s a change in monetary policy, since much of the move has been artificially supported.

Let’s take a look at how the S&P 500 has been affected by monetary policy over the past few years, and how investing in stocks at the current level is becoming increasingly risky.

S&P Large Cap Index Chart

Chart courtesy of www.StockCharts.com

The first quantitative easing program by the Federal Reserve lasted from December 2008 until March 2010. This period is not shown on the chart above, as one could argue that the S&P 500 became extremely oversold and that investing in stocks for the long-term made sense at … Read More


How to Insure Your Portfolio as Fed Second Guesses Its Monetary Policy

By for Investment Contrarians | Dec 5, 2013

Fed Second Guesses Its Monetary PolicyOne of the most interesting ideas that came out of the last Federal Reserve meeting at the end of October is a serious issue for everyone, including the Federal Reserve and the eventual impact of monetary policy. And that idea is that slow productivity growth might actually be the new norm. (Source: “Minutes of the Federal Open Market Committee,” FederalReserve.gov, November 20, 2013.)

Since the Great Recession, worker productivity has been running at roughly half the rate that the U.S. experienced over the 25 years prior. The problem is that potential gross domestic product (GDP) growth comes from a combination of productivity and the labor force.

If productivity stalls and the Federal Reserve continues with its monetary policy, at some point, this excess cash will begin to seep into the economy and cause inflation.

The reason we aren’t seeing inflation in the official data despite record levels of monetary policy is that the velocity of money has been low. This basically means that money is sitting in bank reserves or is being funneled into assets, such as stocks, instead of being channeled into the actual U.S. economy. There is asset inflation, but the official measures don’t track items like the stock market.

However, at some point, this begins to shift, especially when worker productivity remains low. The last time productivity hit such low levels was during the 1970s, and we all know what happened to the U.S. economy during that time.

Clearly, the monetary policy program run by the Federal Reserve is not having a positive impact on the real economy, as unemployment remains stubbornly high.

While the Federal Reserve … Read More


Why the Sell-Off in Gold Bullion Is Based on Faulty Logic

By for Investment Contrarians | Nov 15, 2013

Gold Bullion Is Based on Faulty LogicOver the last few days, gold bullion in U.S. dollars has been under selling pressure yet again. With the price of gold bullion pulling back, one obvious question arises: what’s the appropriate investment strategy at this point?

Many are pointing to talk that the Federal Reserve is about to reduce its monetary stimulus, and this has led some investors to adjust their investment strategy by reducing their gold bullion holdings.

There are several interesting points to make about the argument for this investment strategy. Firstly, members of the Federal Reserve, along with other central bankers around the world, have explicitly stated that inflation is far too low—the opposite of what these investors who are bearish on gold believe.

Considering that the Federal Reserve has all the control in terms of money supply and it is adamant in its goal of increasing inflation, I certainly wouldn’t want to fight the Fed.

So, the media is stating that the reason people are shifting their investment strategy on gold bullion is because the Federal Reserve is about to begin reducing money printing due to the increase in inflation…

Since when does higher inflation lead to lower gold bullion prices? It just doesn’t. If inflation gets out of control, I would rather already own gold bullion than join the crowd scrambling to jump on board again.

If anything, having the Federal Reserve and global central bankers pushing their foot on the money printing accelerator just means a greater increase in the probability of inflation.

Inflation, of course, means higher asset prices. As an investment strategy, when an economy is encountering inflation, the one place … Read More


Monetary Stimulus Leaving Average Americans and Precious Metals Behind

By for Investment Contrarians | Nov 14, 2013

Leaving-Average-Americans 2Why is the average American falling behind in our economy?

Millions of Americans feel as though they are being left behind while the disparity between themselves and the rich continues to grow.

Over the last few years, the Federal Reserve has enacted the most aggressive monetary stimulus program in the central bank’s history. But even with the Fed’s trillions of new dollars thrown into the economy, most Americans do not feel any more financially secure or wealthier than before.

Now, when we look at the stock market, one could easily assume that the monetary stimulus brought on by our central bank is having a positive impact.

Let’s take a look at another country whose central bank has also been pushing a very easy monetary stimulus program for years; of course, I’m talking about the Japanese central bank.

We all know the Japanese economy has been in a slump for multiple decades. If monetary stimulus were the answer to all ills, why is Japan’s economy still weak? Let’s take a closer look at the average Japanese citizen for the answer.

According to a report by Japan’s central bank, 31% of Japanese households have no financial assets—a new record-high. This survey has been conducted since 1963. (Source: Bank of Japan web site, last accessed November 12, 2013.)

How could this be? The central bank in Japan has been pushing a very aggressive monetary stimulus program, which has led to a drop in the value of the country’s currency and an increase in the stock market in Japan of approximately 60% this year.

While monetary stimulus by the central bank did help push … Read More


Update: Gold a Boon for Speculative Traders

By for Investment Contrarians | Nov 14, 2013

Gold a Boon for Speculative TradersIt’s been over a month since I looked at gold, so perhaps it’s time to review my evaluation on the yellow precious metal. To recall, I didn’t like the metal at $1,800 an ounce, or even after its declines to $1,600 and $1,500. I didn’t even like it at $1,300.

Even when gold rallied from below $1,300 to $1,365 after the Federal Reserve decided to not begin tapering its bond buying at the September Federal Open Market Committee (FOMC) meeting, I refused to jump on the band wagon. It just wasn’t the right time.

The problem, in my view, was a lack of reasons why I should buy. In fact, buying into equities in mid-September would have offered investors returns, while losses mounted in gold.

Now, I keep reading about how China is buying more and more gold. Rumor has it that the country is building a big safe-house in Shanghai that could store up to 2,000 pounds of the shiny metal. Sorry, but I’m still not quite convinced that gold is a buy right now. I’m still not impressed.

China has over $3.0 trillion in cash and needs to do something with it. For China, buying U.S. Treasury bonds may not be the best idea, given that the U.S. government appears to be a mess and debt levels just keep rising. So that just leaves gold—luckily, the Chinese love the metal.

Tensions in the Middle East appear to be quiet, but you never know when a conflict could arise, especially with Syria being accused of playing the rest of the world with its agreement to allow the destruction of … Read More