Want to know how much power the Federal Reserve holds?
Late Tuesday, the Fed announced it would spend $600 billion on a program of buying Treasury bonds. That’s in addition to what it will also spend by reinvesting the proceeds of other bonds it had purchased already.
On Wednesday, the S&P soared nearly +2%, creating about $220 billion in market cap in a single day.
I can’t say it was unexpected.
[ad#Google Adsense]You see, every year for my StreetAuthority Market Advisor readers, I put together two lists. First comes a list of my predictions for the coming year. Next is a list of my top 10 stocks for the year.
About a week before the Fed’s announcement, I sent my predictions for 2011 to my subscribers. Prediction No. 9 called for this next round of quantitative easing, or as it’s more elegantly called, QE2. But that was only part of the prediction. Now that the first half came true, I also predicted exactly where I want to invest based on the news… and it’s looking good, too.
Bernanke is between a rock and a hard place. He’s trying to get the Fed to steer a course between inflation and deflation.
When deflation rules, you want to be holding utilities, bonds, and other assets that generate fixed income. But if inflation takes control, you’ll want to run from them.
A few months back, I hammered out my argument for why inflation looks to be the ultimate victor. If there were ever a recipe to cook up uncontrolled price hikes, we’ve been stirring together the right ingredients.
The government has kept interest rates locked at zero since December 2008 and ran the deficit to alarming levels — it’s up another $3 trillion in the past two years.
Now Bernanke and the Federal Reserve intend to take even stronger action.
We’re nearly out of monetary ammunition. But the Fed can always print more money and then use it to purchase long-term Treasuries. The goal is to inject cash into the system, lower borrowing costs and stimulate bank loans and other economic activity.
Sure, the additional liquidity might provide some temporary economic support. But running the printing presses will also devalue the dollar. And I’m afraid the resulting inflation will push bond yields and borrowing costs higher — countering the policy’s very objective.
Modest inflation is surely preferable to deflation. But the pendulum could easily swing too far in the other direction.
I can already see this in the spreads between 30-year Treasury bonds and comparable Treasury Inflation-Protected Securities (Treasuries that adjust for inflation rates), which have widened this month.
So if the Fed has signed off on creating inflation, then Ben Bernanke has essentially told me where to invest.
Action to Take–> This was already an ideal environment for commodities. Soybean and wheat futures have surged. Aluminum and nickel are at multi-month highs. Copper is within striking distance of an all-time high. And precious metals have streaked higher and higher.
I’m confident this intervention will make the commodities markets fertile ground again in 2011. That’s why I own shares of Silver Wheaton (NYSE: SLW) in my Market Advisor portfolio (to be fair, I have owned them since late 2009).
The precious/semi-precious metals are prime inflation hedges. In fact, shares of Silver Wheaton were up +14.6% this past week alone.
Thanks Mr. Bernanke.
— Nathan Slaughter
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Source: StreetAuthority