Monday, August 12, 2013

Fed tapering?

Folks, the enclosed article from Zero Hedge below is long-ish, longer and more esoteric than what I normally like to broadcast, but it's important enough to comment on.

Due to its length, I will give you the Cliff notes version.  QE has to be tapered, because the US Treasury borrowing needs will be reduced 30% later this year, and by extension, so will the need for debt to be monetized.

Hence, the Fed will buy fewer US Treasuries as part of QE, perhaps reducing QE from its current $85 billion to approximately $65 billion per month.

Therein lies the problem.  This will shock markets, tanking all of them.  Mere jawboning by Fed Chairman Bernanke of "tapering" QE a couple months ago caused equities and the bond markets to plummet, and remember:  tapering doesn't mean ending or reversing QE; it suggests reduction of QE.  When and if the Fed actually follows through with it, expect markets to really tank.

This will probably irrationally include precious metals declining as well, but the rebound will be quick and severe, as it was in late 2008.

Why?  Because when stocks and bonds collapse, this will provide cover for the Fed to STEP UP QE, which is essentially nothing more than legalized counterfeiting.  Bernanke is leaving his post just at the right time--right when things will get really ugly in the next few years.  Remember:  Bernanke replaced Greenspan in 2005.  We all know what happened in 2007-2009.

So what should one do leading up to this scenario before September?  For one, lowering expectations for higher equities would be a start.  I am not an equities expert, but some may even short the market.  Pull some profits off the table, taking profits, increasing cash positions, etc.--those are all euphemisms for protecting your portfolio gains.  Stay in solid stocks in case they keep rising.  Also, equities may continue to rise as the dollar sinks--even if inflation-adjusted returns are treading water.

If one already has gold and silver, adding just a little more may be good--in case I'm wrong and the Fed continues to step on the easy monetary pedal.  Depending on how much you already have relative to how much you think you need, you can add a little more or just sit still, and wait for a collapse--although that collapse may not occur.  That's why you already have hands on deck with your existing holdings.

However, if you have very little or NO physical precious metals holdings at all, you need to initiate a position, because you don't want the train to leave the station without you, in case the Fed doesn't engineer a collapse of markets first.

For both groups, I give you this thought.  Don't focus as much on the price of gold and silver.  Focus on how many ounces you believe you should own.  If you believe the global and local economy will magically recover, and that all this money printing will not further deteriorate our government finances, then there is no reason to have more than 5% of your net worth in precious metals.

However, if you believe the Fed will continue its 100-year history of debasing the dollar, then you should absolutely own more than 5% in gold and silver.  In other words, if you expect prices on food, gas, utility bills, healthcare, tuition, textbooks, etc. to continue to rise, then buy more gold and silver.

Good luck to all of us.  The waters are about to get stormy, so make sure you have your life jackets on.

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