As an investor, it is usually interesting, and sometimes worthwhile, to pay close attention to the messages coming out of the Federal government. Government policies frequently influence not only stocks, but also bonds, currencies, and commodities such as the gold price and silver price. Based on the significant, unusual, and quite eventful economic developments of the past few years, the government has taken on the role of reassuring the American public that things will be ok and ultimately return to “normal.”
However, there is a relatively substantial and growing contingent of market participants and economists who believe that the economy has entered a “new normal”, which involves considerably less debt and leverage in the system. That goes for both corporations and consumers. These people cite low interest rates and encouragement of homeownership for all by our government as some of the main causes for the blowup of the debt bubble in 2007 and 2008. And they go on to say that this type of debt fueled economy is not coming back for a long time because of the destruction caused in 2008 with the threat of the financial system unraveling. Instead, a new normal has arrived, consisting of more government intervention in and regulation of the financial markets, coupled with a scared and cautious consumer. They say this because the psychology of the average person on Main Street has changed, after seeing his/her investment portfolio cut in half for the second time in less than a decade, the value of his/her home decline dramatically, and perhaps even his/her job disappear.
Against this dichotomy, financial markets (and the stock market in particular) play a large role in validating or falsifying the claims of these competing groups because the markets have a large influence on the collective psyche of the nation. Currently the stock market is making new highs for 2009, several pieces of economic data have improved, and consumer confidence is back to levels last seen just prior to the start of the recession. Obama also just reappointed Bernanke as Fed Chairman, a few days after a recent financial headline stated “Bernanke Saved the World”, and the President claimed that Bernanke’s “creativity” helped him to prevent another Great Depression.
But the American people have seen this movie before. Back in 2006 and 2007 Bernanke claimed that the problems in the housing and subprime markets were “contained.” Everyone saw how that claim turned out. Then in the summer of 2008, Henry Paulson claimed the financial system was “sound.” The American people again saw how accurate that statement was. So it appears that those officials responsible for overseeing the largest economy in the world were either not able to properly assess the dangers in the system, or they were not telling the American public the truth. Whatever the case may be, given these missteps, people should turn to history before merely taking the government at its word. One only need look back to the famous 1930 quote by Herbert Hoover in which he assured everyone that things would return to normal, only to see the country subsequently suffer an entire decade of economic depression. It therefore seems that, less than a year after the most recent crisis, a bit more time must pass before announcing that everything is back to normal.
What does this all mean for the average investor? It means that the potential exists for more pain ahead, especially after a 55% rise off the March 2009 lows (which at the time was a 58% decline from the October 2007 high). It also means that investors should seek out asset classes that will benefit from the government’s ever-increasing role in the financial markets and economy. Accordingly, based on the most recent Federal Reserve meeting, the Fed provided little indication that it was ready to withdraw the easy monetary policies it has used to combat deflation. This type of language suggests that the Fed will continue to keep interest rates low and expand the money supply whenever it feels necessary to improve liquidity. These types of measures will continue to put pressure on the US dollar and benefit the dollar denominated gold price the ultimate benefactor of money printing. In fact, gold and mining companies leveraged to the gold price stand to perform particularly well in this type of environment, as investors seek out a safe haven from the fiat currencies created out of thin air. So the next time one hears the government claim that the coast is clear, he/she should remain skeptical and consider those areas that will benefit from a rising gold price.
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