Market Overview

Government Almost Forcing Investors to Buy Everything (SPY, LQD, IEF, GDX, VNQ, CRBQ)


Since the beginning of the financial crisis in the fall of 2008, the United States government has been on a non-stop stimulus, quantitative easing, and asset support campaign unprecedented in scale and reach.

Think about that for a second. Over the past 2 years the United States (along with several foreign governments) have been supporting (and interfering) with the private sector to an extent not seen for 80 years. Interest rates are near 0%, massive amounts of bailouts have been approved and executed, monetary and fiscal policy are the most accommodative ever, and government stimulus seems never ending. All of this is distorting the ‘real' economy almost beyond recognition.

Even so, the economy has hit a 'soft patch' recently. In response the Fed has basically said they will not allow the economy to slip into another recession. For the first time in history the government is now in the business of preventing ANY downturn in economic activity EVER. It is a monstrous experiment with results unknown.

How does one successfully invest in this experiment? The government is basically saying 'do not save money, but if you do, you better not even think of saving it in US Dollars or Cash'.

Any asset other than cash, however, should benefit (in the short term) from all the government support.

Equities as represented by the SPDR S&P 500 Index ETF (NYSE: SPY) will benefit as the dollar weakens, interest rates stay low (or even fall further), and government spending/easing spurs economic activity.

Bonds (represented by IShares Investment Grade Debt (NYSE: LQD) and the Ishares 7 -10 Year treasury (NYSE: IEF) will benefit as interest rates remain low, possibly fall further with government purchases of treasuries, and the horizon for very low interest rates expands.

Alternative assets such as real estate (Vanguard REIT Index (NYSE: VNQ), and industrial commodities (Jeffries Commodity Equity Index (NYSE: CRBQ) would also respond well as economic activity is subsidized, interest rates remain low, and dollar denominated assets rise in nominal value.

However the advantages to all these asset classes, especially equities and bonds, are shrouded in long term uncertainty. At some point interest rates will rise, taxes will have to rise, entitlements will need to be trimmed, and debt will at some point need to be restructed. Equities and bonds will not perform well as these headwinds take center stage. No one knows when these factors will present themselves, could be in 10 months or 10 years.

The only assets that should retain their value longer term through this ‘new regime' should be gold and some foreign currency based assets. Gold, available through Market Vectors Gold Miners (NYSE: GDX) or SPDR Gold Trust (NYSE: GLD) will keep rising until and unless world governments stop spending, rise interest rates, implement massive austerity plans, and take ‘the pain' up front. This seems unlikely anytime soon. Safe foreign currency assets (conservative equities, some bonds, etc.) will also benefit as the US dollar inevitably falls. This will be especially true versus emerging market assets.

The government is trying to force the public into risk assets. Short term investors will probably comply, longer term however, this might not work as planned. I would advise most investors to hold a decent amount of their portfolio in foreign bonds, conservative foreign equities, commodities, gold, and hedged funds.

We have no choice, we all have to live through the government's mammoth economic experiment, but we do not have to risk all our money on it.


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Posted-In: Long Ideas Bonds Broad U.S. Equity ETFs Emerging Market ETFs Movers & Shakers Forex Global Economics