Money Update today ! READ May 18, 2015

 

Marc’s Notes:

The whole caveat about monetary policy is that today’s tools from the Federal Reserve revolve around the sole action of monetary stimulus through QE. QE means creating money and buying somebody else’s IOU'S with it.

The Federal Reserve will warehouse these IOUS and the money it used to buy them is thought to be used by those receiving it , which is usually the banking sector, will loan it out to us and we will spend it creating demand which will lift all boats sort of speak and create jobs and salaries.

The problem are many with this theory. First off, all that money eventually causes inflation, a result which is seldom disputed but often not seen until its too late in the cycle.

Inflation causes prices to rise. Wages however also rise slower than prices of goods and therefore the more inflation we see, the further behind most of us get. Sure, our wages do eventually go up if inflation persists but they never go up as much or as fast as prices of the things we buy do. That lag between what we pay and what we pay out IS the problem.

The more inflation, the further behind we get. Its gets harder and harder to make ends meet as prices climb yet are wages don’t climb as fast.

This puts more people in the poor house and that need some sort of assistance. This increases the cries for Washington to do something and the only thing they can do is increase public assistance which costs more. To raise the money they either raise taxes or print more money.

The increase in taxes forces more businesses to go under as costs increase and marginable businesses fold, which causes more need for public assistance as more people go into the unemployment line. The government also prints more money which causes inflation to continue which causes’ more people to become poor which in turn increases the cries to Washington to do more which starts the cycle all over again.

It is the reason our economy and indeed many economies of the world are still in a funk with stagant wage growth and more and more people needing assistant which is not a conjecture by me but a fact supported by statistics everywhere. That politicians continue with the flawed model is anyone’s guess . Higher taxes, monetary stimulus and more social programs only exasperate the costs and therefore make the underlying problem worse.

Admitting and accepting this fact would mean lowering taxes and reducing social spending however such proposals would never fly in Washington or with the majority of the general public.

That being said so we are probably doomed to continue this failed model until the policy itself ultimately fails in its entirety.

 

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There is a theory in the investment advisor circle called modern portfolio theory (MPT).

It is the latest in analysis that is thought to be the superior way to handle an investor’s account or handle your own investments.

The modern theory suggests that diversification will reduce risks to a portfolio and I agree with this part of the theory. The more asset classes you own the safer you will be. MPT touts stocks, bonds and cash as the 3 main classes to hold.

Another part of the theory is spreading out investments in classes that move opposite of each other. For years stock and bonds were thought to do this, When one moves down, the other moves up. Stock fall when bonds should rise and bonds will fall if stocks rise.

This was almost entirely true during the period after the great depression in the 1930’s up until our second great calamity, the bust of 2008/2009.

During that recent blow up, bonds and stocks fell in concert. In fact almost every asset class fell, and that in my opinion, blew a giant hole in the modern portfolio theory.

Proponents of that theory would point to the subsequent recovery in both class shortly following the crisis, but I would argue they only did so because of massive intervention by central bankers of the world.

Although the modern portfolio theory is based on free market fundamentals and their natural movements, the intervention was anything but free markets at work. Indeed the massive cash injections into the markets by governments were the exact opposite of it.

That markets recovered due to these anti-market manipulations doesn’t repair the hole blown in the theory. The fact remains without such interventions the crash in bonds and stocks that would have occurred should have shown that the modern portfolio theory no longer is valid.

Although holding cash is a third part of the theory and indeed cash positions held up entirely, the other two parts of the theory, that stock and bonds move opposite of each other was without a doubt proven entirely false, and therefore the modern portfolio theory at least part of it, should be relegated to the trash heap. A new theory should be considered that better reflect the reality of today’s markets and what we learned during the blow up of 2008.

The Money Matters portfolio contains many more assets than the 3 in the modern theory. The MPT calls anything else than cash, stocks and bonds “Alt” or alternative assets and this is where we differ. Those “alts” as they call them are not alternatives but main legs in the diversification ladder. To find out what those additional legs are, try taking a look at the DREAM PORTFOLIO on the website. THAT is what I call a MODERN PORTFOLIO THEORY!

(LINK HERE)   https://www.moneymanagementradio.com/cart/dream_portfolio

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Among the many monetary tools used by the Federal Reserve (and there have been many since 2008) another version will be brought into play in the months to come called the “Reverse Repo”, short for Reverse Repurchase Agreements.

The Fed has been testing these transactions since September and will continue through this year. Fed officials hope the interest rate they set on the reverse repos will set a floor underneath short-term interest rates which they plan to start increasing as soon as their models tell them the economy can weather the rise in rates.

When the Feds raise interest rates they will likely do it very gradually but even a slight uptick in rates might spook interest rates everywhere even higher. They don’t want rates to climb on their own, in an uncontrolled manner or too quickly so they are going to do perform this new trick to try and hold rates where they want them and control the speed of any ascent. They also don’t want rates to move too low so enter the reverse repo program.

The Feds have something called a discount window where qualified banks can borrow and lend money overnight back and forth to the Fed, sort of like a gas pedal for the economy. They exchange debt instruments like Treasuries or agency debt (mortgage packages) for the cash and this back and forth overnight flow in theory helps control inflation (rising prices) or the opposite (and dreaded) deflation (falling prices).

But a lot of financial institutions which control massive amounts of money are not “qualified” window banks and therefore can’t participate in this daily auction.

The Feds know large financial institutions can influence rates due to the amount of money these institutions control so they invented this reverse repo thing to gain more control over a greater number of financial institutions and the funds they have under management. The theory is the more control the Feds have the less likely rates will go out of control.

There are about 170 other institutions in this new program which don’t qualify for the normal Fed discount window so these companies will be allowed to participate in the new program if all goes as planned.

The Federal Reserve will take in cash from eligible program participants in exchange for Treasury securities and agency debt owned by the central bank. The reverse repos are essentially collateralized loans to the Fed for a period of one day.

The Feds will pay an interest rate on these transactions and reverse the transaction the very next day

The thought is these institutions won’t lend out money into the `system` for less than the Fed will pay them in the overnight transaction so in essence the Feds can maintain a floor where rates will go no lower. If rates spike too high or too fast the process is reversed or halted to temper the upward rise. In both cases however the financial institutions turn a risk free profit.

Proponents of the program insist this will give the Fed more control over interest rates than they already have while others claim it’s just another way to pad Wall Street coffers with public funds.

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Money Class now taking registrants. So far we only have a few so email for a spot. Date to announced but probably in June or July!

 

Market update:

Commodities and shippers look to be in rally mode after years in the dirt. I am adding Cameco (CCJ) , Frontline (FRO), Diana Shipping (DSX), Copper (COPX)  and Coffee (CAFÉ).The 2 shipping stocks above are high risk, high reward plays.

I added oil months back and continue to maintain a gold position through GGN, GDXJ and GOLD. All of these are rising nicely. My question is will gold continue to hold. Ditto with silver. I hold SVM for a high risk, high profit play.

Alibaba looks to be finally getting on its horse and of course there is always Apple. Investor Carl Ichan is pushing Apple higher with his constant barrage of press. It is tough to bet against such a force. I continue to hold Apple for the long term. I-Watch sales could push it either way in the short term however.

Emerging markets were tearing upward but recently stalled. It could be a consolidation before the next leg up. I did just add Europe stocks in the form of HEDJ.

Keep in mind these are not recommendations for anyone. This is just what I am doing. Do your own research and diligently please for anything you buy!

Euro problems (specifically Greece) seem to ongoing as predicted and Greece wont withdraw from the Euro or pay. They will get extension after extension because Greece has the ECB over a barrel. The ECB will keep Greece in the Euro at all costs and Greece knows that. It is fun to watch though!

For now, keep tuned. An estate attorney will be on the show this Thursday to talk about estate planning. A must for everyone.

All for now but sign up for the Money Class asap!  

Also note a special announcement may be upcoming which will mean I may be able to manage funds for a small number of investors through a local firm later this year. Stay tuned!

Stay Tuned!

Marc