Effor.com

Ok, I don’t understand how such bright and well educated people can be so stupid.  I’m referring to the Federal Reserve which released their meeting minutes today.   In case you didn’t notice, here’s what happened in the markets today:

Gold and oil hit record highs - http://www.foxbusiness.com/article/gold-prices-hit-28year-high_421594_1.html

The stock market swoons:  http://money.cnn.com/2008/01/02/markets/markets_0405/index.htm?cnn=yes

Here’s some background - basically all commodities have been going up for the past few years.   I’m not just talking about oil and gold - corn, wheat, soybeans, pork bellies (anyone ever bought a pork belly?) - basically anything material “real” thing has gone up at least 35% to 40% or more in the past 7 years.  And it’s not a coincidence that the stock market is about the same as it was 7 years ago, because the reason is the same.  Inflation.

The Fed’s dirty little secret is that they’ve been printing money like mad.  Everytime you see an article mention something like “The central bank, in conjunction with central banks in Canada and Europe, have already conducted two auctions of $20 billion apiece.” (from http://money.cnn.com/2008/01/02/news/economy/fed_minutes_analysis/index.htm) ask yourself where that $20 billion came from.  When you realize that the Fed “created” that money from absolutely nothing, you’ve understood the major issue. 

That $20 billion isn’t setting in a vault somewhere, it isn’t gold reserves that they sold and/or loaned out, it’s not even actually printed - it’s simply bookkeeping entries.  The Fed “made it up” and then loaned it out to banks - so the banks appear to have more money than they do.  It makes the books look better because - get this - the banks don’t even have to report to stockholders that they’ve borrowed the money!  That’s the key to the new “Term Auction Facility” that they’re lending the money through.

Unlike the usual overnight Fed Funds borrowing - which is required to be reported - there’s no reporting requirement for the TAF.  Since the Fed is sen as the lender of last resort, borrowing money to cover shortfalls from the Fed meant that that bank was struggling.  Now that they can do it secretly, the banks will do it even if it carries a higher interest rate, because they don’t need to disclose the fact.  And the Fed gets to “print” another $20 billion and put it into circulation.

They quit reporting on M3 a while back, but you can still find it at a site that compiles it from publicly available information.  Check it out at: http://www.nowandfutures.com/key_stats.html

Is it starting to make sense yet?  In a nutshell, it’s simple supply and demand.  We’re putting more dollars into circulation, but there’s nothing behind them - no tax revenues, no gold or silver deposits, not even the fake backing of government bonds.  What happens when you increase the supply of something but the demand doesn’t change?  That’s right, the price drops - but in this case the thing that’s dropping in price is the money itself, so real things (commodities) HAVE to go up.

Prediction:  Commodities will go up and down in 2008 (brilliant huh!) but they’ll go up a lot further than they go down.  You won’t regret putting 20% to 30% of your portfolio into some gold, oil, Euro, corn, etc, ETF’s a year from now.  And until the Fed stops printing money like madmen, the commodity boom will continue.

gk

Tags: Economy, Federal Reserve, Gold, Inflation

This entry was posted on Wednesday, January 2nd, 2008 at 8:59 pm and is filed under Uncategorized. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.