About 2 months ago, I wrote on my Facebook’s status that I did not know whether or not I needed to forecast for inflation or deflation. Many of my friends, colleagues, and clients were facing the same dilemma. Financial advisers had both of their feet in one shoe because they did not know what investment advice to give to their clients. Investment strategies are world apart during inflation or a deflation. Inflation! Inflation! Inflation! Yes, I am expecting hyperinflation–the price of things is going to go up. Nope! I am not Miss. Cleo. I have evidence that can support my perception.
The Federal Reserve (The Feds) is thinking about a second round of “Quantitative Easing, also known as QE” Quantitative easing is a government monetary policy occasionally used to increase the money supply by buying government securities or other securities from the market (http://www.investopedia.com/). The preceding policy had many trade-offs and one of the most common is inflation or hyperinflation. Hopeful, we will not end up like Germany after the World War I where we will have to push wheelbarrows full of money just to buy a loaf of bread.
The first round of “Quantitative Easing” was to keep interest rates at nearly zero percent and they have been at that rate for about two years now. The second round will involve the federal government buying treasury bonds and private securities. The preceding process will provide the economy with the liquidity that it needs. However, excess liquidity is a fancy name for inflation.
The Dow Jones reaching 11,000 points today is another indicator that Wall Street, once again, is a lot smarter than the federal government. Let me explain! Investing is all about buying low and selling high and the difference is capital gains. Wall Street knows that the government is going to buy treasury bonds and private securities in order to stimulate the economy, therefore they went ahead and bought securities. Wall Street’s speculative transactions pushed the Dow to the 11,000 mark for the first time in 5 months. The moment the federal government starts buying securities; Wall Street will start selling them
Productivity, efficiency, and effectiveness are the best fundamentals for real equity growth. Quantitative Easing lacks all three of these preceding fundamentals. Dow 11,000 mark is flawed. Responsible investors must leave their money in fixed income accounts and leave the stock market for speculators for now. Once again the government is about to make strategic decisions that promise to help Wall Street more than Main street
MacKenzy Pierre is president and CEO of MacKenzy Credit Group. He is the author of the article “Creating a World without Bad, Unethical, and Profit-Driven Company”
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