Today's Digest will be brief. But we must start with a comment on the Federal Reserve's announcement today... And why low interest rates for another three years, though good for the markets, is bad for the economy.
The Federal Reserve today said interest rates will stay low until at least late 2014. And it expects unemployment will remain high and inflation will remain "subdued." At last appearance, our central bank said it would keep rates near zero percent until the middle of 2013.
"The Committee expects to maintain a highly accommodative stance for monetary policy," read today's statement from the Fed's Federal Open Market Committee. "Economic conditions – including low rates of resource utilization and a subdued outlook for inflation over the medium run – are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014."
Asked poolside in St. Maarten for his comments on the Fed's actions, Porter's only reply was a mumbled, "This is what they call the great de-leveraging? It's more like the great un-de-leveraging. Inflation is coming."
In reaction to the news that the world's debt will simply be refinanced at lower rates and extended, the world is rushing to government debt. The yield on 10-year Treasurys fell 13 basis points (0.01%) to 1.94%.
And Germany, Europe's safe-haven economy, is selling debt at record lows... Germany sold 2.458 billion euro ($3.2 billion) at an average yield of 2.62% – the lowest yield since the inception of the euro. That's down from 2.82% at the previous auction on October 12.
At least gold rallied, as it should in the face of such news. The precious metal jumped more than 2% to $1,699 an ounce.
Dan Ferris e-mailed his comments on the situation earlier today...
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When people are really scared, they buy cash, not gold. People sell gold for cash all the time. When I go to the coin store to buy Krugerrands, there's always a line of people with their arms full of gold jewelry and coins. They're all selling. |
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It's like Reverend Jim Jones and the People's Temple of Jonestown, Guyana – the original "drink the Kool-Aid" moment. Everything is wonderful... you're in an exotic land, learning from your charismatic leader about the paradise you and your family will soon inhabit. |
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Then one day, you wake up, and he's convinced you to force your kids to drink cyanide. And you've allowed him to brainwash you into drinking it, too. Before the day is over, everyone is dead. Any sane, rational person could have seen the whole affair would lead to no good, but few would have guessed it would have killed everyone involved. |
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It's the same way with paper money. Everything is wonderful... You're in the richest country on Earth, enjoying the highest standard of living (even if you're described as "poor"). Your charismatic leader tells you taking more from rich people and putting 45 million people on foodstamps will make the country stronger. You believe him because it's the easy, lazy thing to do. Or maybe you don't, but after all, what can you do? |
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Then one day, you wake up, and the government is $15 trillion in debt, with tens of trillions of dollars more in present value of future liabilities. You're scared, so you do what they tell you. You drink the Kool-Aid and buy Treasurys. That's the fatal mistake... It won't be long now... Say adios to all you've worked for. It's on its way to money heaven. |
New 52-week highs (as of 1/25/12): Westport Innovations (WPRT), Bladex (BLX), Wal-Mart (WMT), Intel (INTC).
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Goldsmith comment: All doom and gloom? Perhaps you haven't been reading the Digest recently... On Monday, we declared "The bull is back." Last Thursday, we announced, "Stocks hit new highs." We've explained several times, that while our long-term thesis is bearish (in particular, that the dollar will lose its place as the world's reserve currency), we will see some short-term gains in the market. It's inevitable, when every central bank in the world is pumping money into the system.
Regards,
Sean Goldsmith
Philipsburg, St. Maarten
January 25, 2012
Free money for three years... Porter's poolside chat... Bunds sell at record lows... Dan on Kool-Aid...