Want to know how much power the Federal Reserve holds?
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.
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
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
The government has kept interest rates locked at zero since
December 2008 and ran the
to alarming levels -- it's up another $3 trillion in the past two
Now Bernanke and the Federal Reserve intend to take even stronger
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
the dollar. And I'm afraid the resulting inflation will pushbond
yields and borrowing costs higher -- countering the policy's very
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
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
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 (
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
Nathan Slaughter's previous experience includes tenures at
AXA/Equitable Advisors and Morgan Keegan. In addition, he's
earned Series 6, 7, 63, & 65 certifications. Read more...
Disclosure: Neither Nathan Slaughter nor StreetAuthority, LLC
hold positions in any securities mentioned in this article.