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Thursday, March 19, 2009

US Government announces printing of cash will solve US problems

OK, my title is a bit of a paraphrase of what the Fed announced Wednesday. I'm glad I didn't sell my longs, and of course, hindsight being 20/20 wish I bought more. :)

So recap of today, the Fed announces two critical actions.
1) The Federal Reserve. a Branch of the US government, will buy 300 Billion of long term securities from the US Treasury, a branch of the US government. (This is the start, not the end of this policy)
2) The Federal Reserve, will purchase an extra 750 billion in "bad debt" from private institutions.

The news of this sent the markets soaring....and Gold, OIL, resources soaring!

So obviously if everything went up this is great news, right! Let me dive into item #1 a little more. After the Fed buys treasury department bonds, the treasury will then have the ability to mark the "Debt" sold the same as if it was sold to say...china. The Treasury can then print money, or do other financial actions with the "investment" it receives from the Federal Reserve.

Whats wrong with this? Let me go a little slower. Lets say I create two companies of which I own 100% of. If company A, buys debt of Company B, and Company B now has more "cash" to invest with, am I "more wealthy"? (for the conrads out there, its NO!)

ANY Announcement the "Skeptic" should ask, is the action that the government is taking "fixing" a root problem with business?
In the current situation it needs to be addressing
1) Transparency to regain trust of corporations (Honest accounting )
2) Enforcing laws to bankrupt companies that are in fact, bankrupt
3) Curb debt spending to strengthen the US balance sheet.

If it doesn't do one of the 3 items above, alarm bells should go off.
For a more in-depth analysis, read Mish's Post here.

OK, so what does this mean for investing, currency, and resources?

Well, in general, resources exploded today! This on anticipation that the USD will fall significantly, requiring more USD to buy resources. Also banks, and equities exploded today! in anticipation this "Free money" will raise market valuations.

Who knows where this ends, testing the 200 DMA yesterday I thought was slim, now I think its extremely possible in the months to come.

Bottom line is, steady with buying resources. Hold onto to lottery tickets, and enjoy the ride while it lasts. If you look into history "printing free money" has never brought prosperity to a country. It has brought high inflation, market collapses, and revolution. This kind of a rally is what I expected mid January, I was a tad bit early...again. Happy John kept the faith in the government doing the wrong thing, and the government didn't let us down.

If we rally into Friday close, you may want to consider lightening up for a possible Monday reversal.

I'm still not convinced gold is on a mega bull run, waiting to see gold go above 1100 and ounce. Long term however, this is the first step, in a series of steps, to ensure resources are winners, and all USA citizens are losers. Enjoy the ride.
Update Thursday 8 am: Both Gold and Oil on an incredible tear today, I may eat my hat on the gold comment just last night.

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