Investment Contrarians

monetary policy


Did You Give Thanks this Weekend for the Fed’s Easy Money Policy?

By for Investment Contrarians | Aug 6, 2014

021213_IC_leongStock Market Crash August 2014.

Reflecting on this past Thanksgiving weekend, there was a lot to be thankful for, especially if you have been long in the stock market for the past four years. Now is a time for reflection.

The advance in the stock market has been stellar following the bottom in March 2009. The S&P 500 is up 171% since March 6, 2009 for a four-year annualized gain of about 38%.

In Japan, the Nikkei 225 is at a six-year high and over in Germany, the benchmark DAX is also at a record high.

However, the records in the stock markets are falling, not just in good old America, but worldwide. Of course, there are the exceptions, such as China, which I still consider to be undervalued and worth a look for investors searching for growth in foreign stock markets. In China, you can play almost anything due to the country’s insatiable appetite for goods and services. Some of the top areas for growth in China are the technology, health care, travel, and financial services sectors.

Yet while all of the stock market records are being set, I wonder if this is simply the new reality for stocks, or are we just setting ourselves up for a massive hangover when stocks fall? stock market crash 2014.

The Russell 2000, for instance, is a play on the economy. The idea is that small companies tend to fare better when the economy recovers, as these companies tend to be more flexible. The index is up over 35% this year and more than 40% year-to-date. That’s a great advance, but the … Read More


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


With New Fed Chair Unlikely to Taper, How Does Your Portfolio Profit?

By for Investment Contrarians | Nov 18, 2013

How Does Your Portfolio ProfitWell, Yellen has shown her cards; we now know the hand she’s playing. The Federal Reserve will stay status quo. In testimony relating to her nomination and expected approval as the next Chair of the Federal Reserve, Yellen didn’t hold back, stating the low interest-rate environment allows the central bank to employ its loose monetary policy to drive the economy and not fear inflation.

As Yellen stated, “I believe that supporting the recovery today is the surest path to returning to a more normal approach to monetary policy.” (Source: Bull, A. and Spicer, J., “Yellen says stronger job growth a Fed imperative,” Reuters, November 12, 2013.)

Sounds just like good ol’ Ben Bernanke, doesn’t she? But then that’s what everyone expected from Yellen, who is known as a near-replica of Bernanke and his views towards the economy and the use of monetary policy.

Look, folks, the easy money from the Federal Reserve will likely continue for the foreseeable future. If Bernanke doesn’t decide to begin tapering in his last Federal Reserve meeting in December, it will be up to Yellen to bear this burden, and it appears she may drag it out. Perhaps Bernanke was hoping to begin the tapering process before the end of his second term, but due to a weak jobs picture, it’s not quite an option.

If I was a betting man, I’d put my money on Yellen maybe holding off until later in the first quarter of 2014 to begin tapering. Now, she may begin with a small amount in January, but that all depends on the jobs market in November and December, as she … 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