Top Strategies for an Economically Engineered Market

Back in December, Bernanke decided the U.S. economy was on solid footing and initiated the first round of quantitative easing cutbacks to begin in January. Instead of dumping $85.0 billion into the U.S. economy, the Fed added just $75.0 billion.

Last Wednesday, in his final hurray as chairman of the Federal Reserve, Ben Bernanke initiated the second round of tapering. Citing growing strength in the broader U.S. economy, Bernanke slashed the Federal Reserve’s quantitative easing program to $65.0 billion a month starting in February.

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At this pace, the Federal Reserve will be out of the bond buying business by Labor Day. As for interest rates, Bernanke reiterated the Federal Reserve’s guidance; short-term interest rates will remain near zero until the jobless rate hits 6.5%. But not even that is an automatic trigger. When unemployment does hit 6.5%, it will take inflation, the state of the labor market, and the state of the financial markets into consideration.

In light of the current U.S. economic environment, I’m not so sure I’d hang my hat on the so-called “growing strength in the broader economy.”

For starters, U.S. unemployment remains high. It dropped unexpectedly to 6.7% in December, but that number was skewed by a large number of long-term unemployed workers abandoning their search for new jobs. Of those who did find jobs, most were in the retail industry.

Those working in low-salary jobs don’t have much to look forward to. Wages are stagnant. In fact, workers’ wages and salaries are growing at the lowest rate relative to corporate profits in U.S. history.

Furthermore, for the first time ever, working-age people make up the majority of U.S. households that rely on food stamps. A few years ago, children and the elderly were the main recipients. Today, one in seven Americans receives food stamps.

It gets worse. For the week ended January 25, jobless claims in the U.S. economy jumped more than forecast to the highest level since mid-December. Unemployment claims climbed by 19,000 to a seasonally adjusted 348,000. The ever-jubilant and out-of-touch economists expected claims to edge up to just 330,000.

And after a festive December, consumer confidence is hitting the skids. U.S. consumer confidence unexpectedly declined in January to 80.4 from 82.5 in December. Economists expected it to increase month-over-month. For a country that gets 70% of its gross domestic product (GDP) from happy consumers flush with cash—this is not an encouraging sign for the U.S. economy.

In light of that, just how well is the U.S. economy doing?

Preliminary GDP numbers show the U.S. economy grew by just 3.2% at an annualized rate during the fourth quarter, down from 4.1% in the third quarter.

What about housing in the U.S. economy? December pending home sales tanked 8.7% month-over-month to 92.4, the lowest level since October 2011. December new-home sales fell more than expected, dropping seven percent to a seasonally adjusted annual rate of 414,000. December existing-home sales rose a less-than-expected one percent month-over-month at an annualized pace of 4.87 million units.

In spite of obvious concerns about the health of the U.S. economy, the Federal Reserve continues to wear its financial engineering blinders. Investors on the other hand, shouldn’t.

Risk-averse investors looking for safety might want to consider long-term bonds or a long-term bond exchange-traded fund (ETF), such as iShares 20+ Year Treasury Bond TLT. Investors looking to hedge their bets might also want to consider a gold ETF, like the SPDR Gold Shares GLD or The Direxion Daily Gold Miners Bull 3X Shares NUGT.

This article Top Strategies for an Economically Engineered Market was originally published at Daily Gains Letter