QE2, the $600 billion bond buying program using printed money that the Fed began in November will end June 30.
This is important because since the financial crisis began, the stock has only gone up when the Fed is printing money. When the Fed ended its last money printing operation, QE1, on April 1 last year, the stock market began to stumble very quickly in May resulting in the May Flash Crash followed by a bad summer for stocks. The bad summer only ended when Fed Chairman Ben Bernanke announced that he would do a second round of money printing.
Hence, a number of investors who have invested in stocks may begin to pull out ahead of the end of QE2 to avoid the downward turbulence that may follow. Already, we are seeing a downtrend in other investments that have likely benefited from the flood of cash that Fed has put into our economy. In particular, silver seems to be leading the way in this shift. At our money management firm, we sold all of our silver back when it hit $47-$48 fearing that it had simply run too high too fast and was ripe for a big pullback.
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This would further a trend in the market toward what’s called risk on/risk off movements. This means that when the market fears risk it moves out of ALL risky assets — stocks, gold, commodities — and moves into less risky assets, primarily bonds.
Hence, it is hard to balance a portfolio if all risky assets are moving in the same direction. I think this will change and commodities and gold/silver will de-couple from stocks, but that clearly isn’t going to happen this summer.
So be prepared for turbulence in the higher risk investments leading up to and just after the end of QE2. The big question is when will Ben start the printing presses again. My view is that he will have to at some point, but I can’t say exactly when he will decide to do so. And, when he does, it will more likely be in the form of an open ended commitment to “print as needed” rather than a specific amount, such as the $600 billion for QE2. It will be an interesting story to watch unfold.
One thing we can be sure of is that the uncertainty surrounding the effect of no more money printing and the uncertainty surrounding when or if it might begin again will produce a lot more volatility in the market during the summer. Sorry, no summer vacation for investors this year!
About the Author: Robert Wiedemer
Robert Wiedemer is a managing director of Absolute Investment Management, an investment-advisory firm for individuals with more than $80 million under management. He is a regular contributor to Financial Intelligence Report, the flagship investment newsletter of Newsmax Media. Click Here
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