- Published on Wednesday, 04 April 2012 08:00
- Written by Andrew Snyder, Editorial Director, Inside Investing Daily
- Hits: 1302
Market Manipulation: This Number Changes Everything
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This is the most disturbing figure I have seen since the day the market imploded in 2008. What it means for the fate of the American economy, the health of our society and your wealth... I honestly can't say.
We've never seen anything like this before.
But I can guarantee you this. It's unstoppable and the outcome will be painful.
Here it is: The Federal Reserve bought 61% of Uncle Sam's debt last year.
Let me tell you what that means.
It means Washington has pushed the notion of free markets out the back door. The price discovery mechanisms at the heart of our economic way of life have been gutted like a flopping fish.
It means what we feel when we take the pulse of the bond market is entirely fake -- the result of Bernanke beating on the chest of our zombie economy.
And it means, worst of all, countless investors will get fried when the Fed's funny money disappears.
"To put this in the simplest terms," said our Zach Scheidt during our investment team's weekly conference call, "imagine a collectible like art. What if 60% of the art market suddenly disappeared? Prices would plunge."
That's exactly what we expect to get from the Treasury market.
It's not if prices plunge... but when. The only variable is the Fed's political endurance. How long can Big Ben keep the cycle going?
I dare to say it, but what if the cycle mysteriously ends on Nov. 6? What if Obama loses and hands his victorious rival a gift that we'll never forget?
It's a devious thought, but let's not forget Obama's nuclear blast to democracy on Monday -- his disdain for the idea that an "unelected" court would overrule a bill passed by the majority of Congress. If our president has the guts to toss aside the system of checks and balances that separates us from our enemies... dare we ask where it stops?
But that's beyond my message today. My goal is to warn you about the Treasury trap and inform you of your options.
The fact the Federal Reserve owns over 60% of the debt the Treasury issued last year should be all the proof you need of the trouble ahead. Unless Washington wants to go the way of Argentina or, worse, Zimbabwe, the buying spree must end.
When it does, bond prices will plummet and interest rates will surge... and the economic rebound none of my colleagues trust will be history.
So what are your options?
On Monday, I put together my notes for the latest Unconventional Wealth quarterly video update. I outlined three opportunities hidden in this mess.
They are income-producing alternatives (think timber or farmland), commodities and what I call energy-era utilities (most of these offer much more safety than bonds and far stronger returns).
Each of these sectors will offer outsized rewards as the bond market melts away.
But while I'm looking at the long-term implications, Zach tells me he's playing the Fed's manipulation of the bond market for short-term gains.
He says the sector's ready for a strong move and the strategy he uses with his Velocity Trader service is the perfect way to take advantage of it. (I hope he's right. Our former hedge fund boss has money on the line...)
Bottom line -- it's hell when you're bidding against your own country.
Stand idle and you'll get steamrolled by a runaway government. But understand what's happening and how it affects traditional markets... as Zach said, "this is a big opportunity."
Chart of the Day: Don't Be Fooled by the Numbers
By Adam English, Associate Editor, Inside Investing Daily
The U.S. recovery just passed a notable but not very meaningful mark -- two full years of positive job growth.
Even with this progress, GDP growth is teetering on the brink on the edge of a contraction and may not even hit 2% in 2012.
Consumer spending normally drives U.S. GDP and more of us have jobs... so what gives?
Generic metrics like GDP are useful to an extent but they mask forces that affect the real world due to the false sense of precision they offer and the overly broad ways they are used. That means if you want to take a look at the tough situation American workers are going through, GDP isn't going to help you.
Check out our chart of the day...
The chart shows the percentage of GDP that comes from labor -- it is a representation of wages. The chart shows an incredible drop in what American workers have contributed to our economy since 2003.
The 13% drop from a 107.5 labor share of GDP in 2002 to the 95.5 labor share in 2011 is the equivalent of roughly $1.6 trillion.
The chart proves that labor's share of the economy took a hit during the recovery -- thanks mainly to a surge in corporate profits while wages drifted downward.
In other words, American GDP growth has been fed by corporations, gains in markets and the short-term effects of quantitative easing over the past couple years.
It is good that more Americans are finding work every month and that GDP is growing -- even if it is small. But don't be fooled. Real wages are historically low. Americans are struggling to get by and will not spend more until they make more.
The U.S. recovery has not included American workers.
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