Fundamentals Will Rule

Let’s take a quick look at what the heck is happening in the financial markets and how the market seems to be panicking a bit from the cryptic comments of Chairman Bernanke that basically said, “someday”, based on bunch of feelings and not definitive economics, that he might, maybe, possibly slow down the spigot of government dollars being printed and pumped into the balance sheet of banks under what is known as QE3, a program created by the Fed to buy about $85 billion per month of treasury and mortgage off the balance sheets of banks and put them on ours. Now, I could easily sit here and rip into the merits of governments buying bonds from banks simply as another form of bank bailouts, but I won’t. I could rant and rave about how the government is devaluing our dollars in order to allow banks to dump mortgage and treasury bonds and replace them with cash which firms up their balance sheet and reserves at our expense as a country…but I won’t. I could tell you how hyperinflation is historically the outcome of any government who does what we are doing… but I won’t, because none of it matters at the moment. What I mean is that in the long run, real economics always trump government policy and manipulations. Sure, government fiscal policy can have an impact on certain some things for a while, but real economics always win out and always have.

So, if things don’t seem to makes sense to you in the financial markets, don’t feel bad, because things don’t make sense when things are artificially manipulated to a point where the markets and prices are so disconnected from the underlying realities that you start to go numb as an investor.

Let me give you a recent example of things that don’t make sense. Ben Bernanke indicated that if the economy continues its slow recovery that he might be able to back off on the artificial stimulation. Now on the surface, you would think that the market would celebrate that because it means the economy might actually be able to eventually stand on its own, which should be good for stocks, yet today and in recent days, the market feels like it is starting to panic and is possibly setting itself up for a good old summer crash. Here is another interesting thing that doesn’t make sense on the surface: housing prices over the last year have started to rise for the first time since 2006, and yet we are at a 60 year low of the percentage of Americans that own homes. How could that be if we have less people buying new homes, yet prices are rising? If you listened to the show a few weeks ago, you know that the residential real estate market is dominated by investors who have no intention of living in the homes they buy, and that is a formula for a short term rise in prices and a long term sell off as soon as the cap rates don’t work any longer for the investors. Here is the last one I’ll mention today: Gold has been the number one performing investment for the last 10 years, 7 years and 5 years, and yet, during that period, we had barely any inflation at all. And today gold is plummeting again; almost 32% off its high from April of 2011, and the fear is that that we may never see inflation again, because we haven’t for a while.

The world might seem like it’s gone mad, but have no fear…the fundamentals will rule, which means stock prices will likely be much lower at some point, gold will likely be much higher and real estate will not recover back to its artificially inflated numbers of 2006, which we all know was caused by a bubble, not real economics. And speaking of bubbles, remember the rule: bubbles cannot be reinflated once they burst, only new ones can be created, and in this case, it looks like the government pulled the needle out of the real estate bubble and stuck it into the stock market.

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Information presented in this blog post is believed to be factual and up-to-date, but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. Discussions and answers to questions do not involve the rendering of personalized investment advice, but are limited to the dissemination of general information and may not be suitable for all readers. A professional adviser should be consulted before implementing any of the strategies presented.

photo credit: Medill DC via photopin cc

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