Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
Fake It Till You Make It: Will Silver’s Motto Work on Gold? - 19th Jan 22
Crude Oil Smashing Stocks - 19th Jan 22
US Stagflation: The Global Risk of 2022 - 19th Jan 22
Stock Market Trend Forecast Early 2022 - Tech Growth Value Stocks Rotation - 18th Jan 22
Stock Market Sentiment Speaks: Are We Setting Up For A 'Mini-Crash'? - 18th Jan 22
Mobile Sports Betting is on a rise: Here’s why - 18th Jan 22
Exponential AI Stocks Mega-trend - 17th Jan 22
THE NEXT BITCOIN - 17th Jan 22
Gold Price Predictions for 2022 - 17th Jan 22
How Do Debt Relief Services Work To Reduce The Amount You Owe? - 17th Jan 22
RIVIAN IPO Illustrates We are in the Mother of all Stock Market Bubbles - 16th Jan 22
All Market Eyes on Copper - 16th Jan 22
The US Dollar Had a Slip-Up, but Gold Turned a Blind Eye to It - 16th Jan 22
A Stock Market Top for the Ages - 16th Jan 22
FREETRADE - Stock Investing Platform, the Good, Bad and Ugly Review, Free Shares, Cancelled Orders - 15th Jan 22
WD 14tb My Book External Drive Unboxing, Testing and Benchmark Performance Amazon Buy Review - 15th Jan 22
Toyland Ferris Wheel Birthday Fun at Gulliver's Rother Valley UK Theme Park 2022 - 15th Jan 22
What You Should Know About a TailoredPay High Risk Merchant Account - 15th Jan 22
Best Metaverse Tech Stocks Investing for 2022 and Beyond - 14th Jan 22
Gold Price Lagging Inflation - 14th Jan 22
Get Your Startup Idea Up And Running With These 7 Tips - 14th Jan 22
What Happens When Your Flight Gets Cancelled in the UK? - 14th Jan 22
How to Profit from 2022’s Biggest Trend Reversal - 11th Jan 22
Stock Market Sentiment Speaks: Are We Ready To Drop To 4400SPX? - 11th Jan 22
What's the Role of an Affiliate Marketer? - 11th Jan 22
Essential Things To Know Before You Set Up A Limited Liability Company - 11th Jan 22
Fiscal and Monetary Cliffs Have Arrived - 10th Jan 22
The Meteoric Rise of Investing in Trading Cards - 10th Jan 22
IBM The REAL Quantum Metaverse STOCK! - 9th Jan 22
WARNING Failing NVME2 M2 SSD Drives Can Prevent Systems From Booting - Corsair MP600 - 9th Jan 22
The Fed’s inflated cake and a ‘quant’ of history - 9th Jan 22
NVME M2 SSD FAILURE WARNING Signs - Corsair MP600 1tb Drive - 9th Jan 22
Meadowhall Sheffield Christmas Lights 2021 Shopping - Before the Switch on - 9th Jan 22
How Does Insurance Work In Europe? Find Out Here - 9th Jan 22
Effect of Deflation On The Gold Price - 7th Jan 22
Stock Market 2022 Requires Different Strategies For Traders/Investors - 7th Jan 22
Old Man Winter Will Stimulate Natural Gas and Heating Oil Demand - 7th Jan 22
Is The Lazy Stock Market Bull Strategy Worth Considering? - 7th Jan 22
What Elliott Waves Show for Asia Pacific Stock and Financial Markets 2022 - 6th Jan 2022
Why You Should Register Your Company - 6th Jan 2022
4 Ways to Invest in Silver for 2022 - 6th Jan 2022
UNITY (U) - Metaverse Stock Analysis Investing for 2022 and Beyond - 5th Jan 2022
Stock Market Staving Off Risk-Off - 5th Jan 2022
Gold and Silver Still Hungover After New Year’s Eve - 5th Jan 2022
S&P 500 In an Uncharted Territory, But Is Sky the Limit? - 5th Jan 2022

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Republican Victory and Fed Quantitative Easing Mean It’s Time to Shift From Commodities to U.S. Stocks

Stock-Markets / US Stock Markets Nov 05, 2010 - 07:47 AM GMT

By: Money_Morning


Best Financial Markets Analysis ArticleMartin Hutchinson writes: The U.S. economic and investment world has changed fundamentally in the last 48 hours from two key events:

•The massive Republican victory in Tuesday's midterm elections.
•And the $600 billion worth of bond purchases by the U.S. Federal Reserve.
These two events have changed the trajectory of the U.S. economy, probably for the next two years.

As investors, we'd better adapt to them - and fast.

A New Political Landscape
The GOP victory in the U.S. House of Representatives was truly historic.

With more than 240 members out of the total 435 after Tuesday's midterm elections, the GOP will be better represented in the House in the New Year than in any Congress since that of 1947-48.

In fact, there will be at least 10 more House Republicans than in any of the Congresses of 1994-2006 in which the GOP had the majority. That's important: To the extent the House can do anything on its own, the Republican caucus should have the votes to do it, without excessive pork-barrel bribery of fence-sitters.

That wasn't true from 1994-2006. Indeed, the disciplined majority of 1994-96 soon gave way to an "every-man-for-himself" mentality in which only two things mattered: getting re-elected, and grabbing major pork for your district.

Two GOP leaders of that time – House Speaker Dennis Hastert and Majority Leader Tom DeLay – certainly didn't help matters, but they were severely hampered by the small Republican majorities.

Of course, the bad news for Republicans is that they came up several seats short in the U.S. Senate, meaning the GOP only gained control of the House. That reality – and the fact that Barack Obama remains president – likely means that few Republican policies will actually become law.

However, two areas in which the new House can have a genuine effect are fiscal policy and monetary policy, which coincidentally are also the two economic policy areas that have damaged this economic recovery.

Let's look at them both.

Help Wanted: New Policies Inside the Beltway
In terms of fiscal policy, Republicans are determined to cut public spending after its bipartisan bloating since 2007 under presidents George W. Bush and Obama.

Cynics will claim that the Republicans notably failed to cut spending in 2001-06, but they at least restrained it under better leadership in 1994-98, and have a good chance of at least denting its growth now.

President Obama can veto spending bills, but the public and market cost of vetoing spending bills that don't have enough bloat when there's a deficit of $1 trillion or more will make it difficult for him to do so, except at the margins. Thus, spending will come down as a percentage of gross domestic product (GDP), freeing up resources for the private sector.

There may be some tax cuts, too, but these make little difference. Provided the country's credit remains good, the difference between taxes and borrowing is only one of financing; it's the wasteful public spending that is a true drain on national resources.

That brings us to the second key event of the last 48 hours – so called "QE2," which is the Fed's decision to buy another $600 billion of U.S. Treasuries in the next eight months.

That decision is sheer lunacy.

We're talking about having the central bank print $600 billion of new money, which it would then devote to the least-most-productive option in the U.S. economy – financing the government deficit.

The theory is that all this money will drive down interest rates, forcing banks to finance small-business growth – which, in turn, would create jobs.

But there's a problem with that assumption: In today's global marketplace, there are too many alternatives for banks seeking higher yields. It's far more likely that the money will end up fueling commodity speculation and emerging-market inflation.

Indeed, shortly after the Fed announced its plan, José Sergio Gabrielli , the chief executive officer of Petroleo Brasileiro SA (NYSE ADR: PBR), told commentators on the popular financial cable channel CNBC that "more liquidity is good for Petrobras" - especially since, for one thing, that ‘liquidity" increases oil prices.

But that's hardly the purpose of the exercise. It would be much better for the Fed to buy $100 billion or so of small business loans directly from bank balance sheets.

True, that would expose the Fed to risk. But the Fed is already exposed to risk.
If Fed Chairman Ben S. Bernanke really wants the U.S. economy to recover, he should push short-term U.S. interest rates up to a more normal range of 2% to 3%. That would puncture the commodities bubble, make U.S. business lending more attractive compared with foreign lending, and induce U.S. consumers and investors to begin rebuilding the depleted U.S. savings base. After all, if interest rates are zero, and the inflation rate is running at 2% to 3%, what's the incentive for anyone to save?

However, Bernanke has shown us over the past five years that he is a fanatic. He won't raise interest rates unless he is forced to do so.

That's where the new Congress is again interesting. It can't get rid of Bernanke - he's in office until January 2014. However, congressional leaders can harass him mercilessly, using repeated subpoenas and seemingly endless hearings to do so.

Don't forget – there's actually a small faction of the GOP that wants to abolish the Fed altogether. And a larger group wants to go onto a "gold-standard" type of arrangement, or pass statutes to "Volckerize" the Fed, forcing the central bank to run a much tighter monetary policy.

Beyond these, it's likely that a majority of the GOP thinks interest rates should be higher. That's certainly true of Kansas City Fed President Thomas Hoenig – who vehemently protested Wednesday's decision to ease – as well as several other regional Fed presidents who serve on a rotating schedule on the central bank's policymaking Federal Open Market Committee (FOMC).

Moves to Consider Now
How does this all play out come January, when the new Congress takes office?

First, there's a good chance that we'll see at least some reduction in the U.S. deficit.

Beyond that, there's also a very good chance that the new Congress will bring pressure on the Fed to stop buying U.S. Treasuries and to increase interest rates.

That won't work immediately. But it will eventually be good news for the U.S. economy. It will also be very good news for our U.S. investments, except for those in banks, which have waxed fat off the mistaken Fed policies.

Conversely, as January approaches, we may want to start thinking about lightening our positions in commodities, gold and shares that benefit from their continual price rise.

The best investment returns are made by anticipating major economic change before it happens.

The political and Fed moves of the last few days may bring such a change in 2011, and we should be ready for it.

Actions to Take: There are two important categories of actions to take – one direct and the other indirect.

Let's start with the category of "direct" moves to make – since they have to do with your investment holdings.

As Hutchinson notes, the "best investment returns are made by anticipating major economic change before it happens." The midterm election results and the Fed easing of the last few days will bring changes in the New Year – either directly, as in the case of the elections – or indirectly, as we'll see from the backlash that the central bank's "QE2" strategy could bring.

If there are some U.S. stocks that you've been watching, it may be time to take another look. And if you've listened to Hutchinson, and profited from the calls he made when he urged investors to buy gold, it may now be time to take some of those profits off the table, using them for other investments, or as a cache of cash for future opportunities.

The political and Fed moves of the last few days may spawn such opportunities in the New Year. And, as Hutchinson states at the close of today's column, investors "should be ready" for them.

The "indirect" moves investors should make were covered in an earlier Hutchinson column – one that ran just ahead of Tuesday's midterm elections, in fact. But they relate to this latest column – in fact, the moves he recommended in that earlier opinion piece could easily hasten some of the profit opportunities that he's detailing today.

In a column titled, "An Open Letter to Washington: How to Fix the Deficit and End the Bush-Tax-Cuts Debate," Hutchinson urged investors to write to their elected representatives, and to recommend tax and budgetary changes that would benefit the U.S. stock market and U.S. economy. There was a hugely positive response to the article, with many respondents letting us know that they'd forwarded the column and cover letter to Congress. Even readers who debated some of the points recognized that there is a need for change and offered recommendations of their own.

With the election over, it's time to remind those who retained their seats in Congress that we, as investors, demand action. And Hutchinson recommends what some of those specific actions should be in a column and a prepared cover letter that can be easily passed along to your elected representative in Congress.

In fact, once the new officeholders are sworn in and take up their new jobs in Washington after the first of the New Year, it may well be time to remind them, as well.

But don't worry, we'll make sure to help you at that time, too.

[Editor's Note: If you have any doubts at all about Martin Hutchinson's market calls, take a moment to consider this story.

Three years ago - late October 2007, to be exact - Hutchinson told Money Morning readers to buy gold. At the time, it was trading at less than $770 an ounce. Gold zoomed up to $1,000 an ounce - creating a nice little profit for readers who heeded the columnist's advice.

But Hutchinson wasn't done.

Just a few months later – we're now talking about April 2008 - with gold having dropped back to the $900 level, he reiterated his call. Those who already owned gold should hold on, or buy more, he said. And those who failed to listen to him the first time around should take this opportunity to remedy their oversight, he urged.

Well, we all know where gold is trading at today: Yesterday's (Thursday's) surge of $54 an ounce puts it on the doorstep of $1,400 an ounce.

For investors who heeded Hutchinson's advice, that's a pretty nice neighborhood.

Investors who bought in after his first market call are sitting on a profit of as much as 82%. Even those who waited, and bought in at the $900 level, have a gain of as much as 65%.

But perhaps you don't want just "one" recommendation. Indeed, smart investors will want an ongoing access to Hutchinson's expertise. If that's the case, then The Merchant Banker Alert, Hutchinson's private advisory service, is worth your consideration.

For more information on The Merchant Banker Alert, please click here. For information about Hutchinson's new book, "Alchemists of Loss: How Modern Finance and Government Intervention Crashed the Financial System," including how to purchase the book at a 34% discount, please click here.]

Source :

Money Morning/The Money Map Report

©2010 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email:

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or 72 hours after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in