Wednesday, June 15, 2011

Investing with QE2 Ending

QE2 is almost over.  If the Fed is going to create significant amounts of new money out of thin air, then we will move on to QE3 or some other name.  Either way, there is a lot of uncertainty about what the Fed will do and what is going to happen.  There are a lot of variables to consider.

Today was another big down day for the stock market.  Oil was down almost 5%.  The dollar strengthened considerably against the other major currencies.  The one notable thing is that, despite the strong dollar, gold was actually up a little today.

It is anyone's guess as to which way things will go in the next couple of months.  Some of the variables include the Fed's decision on QE3, Greece, the debt ceiling, revolts in the Middle East, and war, just to name a few.  There is, of course, always the possibility of some other unforeseen event occurring.

While I maintain my prediction that the Fed will continue to help Congress in a backdoor default by devaluing our money, the short term outlook is far more uncertain.  If the Fed starts pumping more money or if the banks decide to start loaning out their massive amounts of excess reserves, then we will see significant price inflation sooner, rather than later.

If the Fed stops its money creation for a while and the banks continue to hold their excess reserves with the Fed, then we could see consumer prices stabilize and we could see a significant drop in the stock market with a strengthening dollar.

Right now, investors should just concentrate on wealth protection.  I would recommend that at least a majority of your investments go into the permanent portfolio fund, the mutual fund PRPFX, or something similar.  For the rest of your money, I would put a little extra into investments related to precious metals and I would hold some cash or cash equivalent that you can use to buy up bargains later, if that time comes.

This will continue to be a roller coaster ride.  There will be ups and downs with stocks, gold, oil, the dollar, price inflation, and even real estate.  For the longer term, I still expect more inflation from the Fed and would not be surprised to see stagflation like the 1970's.  If that is the worst that we get, we will be very lucky.  I do not expect the Fed to go to hyperinflation.  I think it will choose a depression over the complete destruction of the currency.  At that point, Congress will be forced to cut spending.

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