Janet Yellen, Quite possibly the most powerful woman in the world, told the world what it wanted to hear when she gave her first testimony to the US Congress as chairwoman.
‘That said, [bond] purchases are not on a preset course, and the Committee’s decisions about their pace will remain contingent on its outlook for the labour market and inflation as well as its assessment of the likely efficacy and costs of such purchases.‘
The markets were happy. The Aussie market rallied 2% this week on her calming words.
That is in spite of a Greek tragedy unravelling our economy.
You know what I’m talking about, all that bad news we’ve been pestered with.
No automotive manufacturing sector within four years…
Unemployment numbers rising to 6%, the highest in a decade…
And Treasurer Joe Hockey telling Australians that mums and dads should invest their retirement money in ‘state and federal government‘ infrastructure assets that have a ‘guaranteed return‘.
So judging by the market rally, Aussie investors liked Yellen’s comments.
However, Jim Grant, founder of the Interest Rate Observer, said this supposed plain speaking Federal Reserve chairwoman didn’t clearly say what she actually meant.
On CNBC, he translated what she really meant.
‘The Fed continues in this unprecedented exercise in price control… What we mean to do is continue to nationalise the yield curve. We want to make the federal funds rate, a government rate, and we would like to enlist the stock market in a program of wealth creation for the security holders of America.‘
He then adds: ‘The Fed has manipulated interest rates for 100 years, but never – until now – has it manipulated the stock market as if it were a lever of public policy.‘
Basically, he reckons Yellen left out that they were more interested in seeing the stock market move higher than restore any sort of stability to markets.
Well, good. We’ve got that out of the way. The Federal Reserve will continue to fiddle with the market and try to control the possible bubble it’s blowing.
So American markets were happy, which meant the Aussie market was happy.
But I can’t lay the blame just with American central bankers. The Aussie branch of central banking boffins isn’t much better. In fact, inflation rose 0.7% in February and our central bankers seem pretty keen on leaving the cash rate where it is.
After all, retail trade data was up 0.7% and 0.5% in November and December respectively. And the Australian Bureau of Statistics confirmed house prices were up 9.3% across Australia. So it’s good news all round!
So what’s an investor to do when central banks meddle with cash and debt?
Normally, I’d suggest stocking up on a little more gold to protect your dollars from inflation. But Diggers & Drillers resource analyst Jason Stevenson reckons the precious yellow metal could fall further before its next bull run.
‘I still see some downside in the gold price. In fact, it could still fall another 15%’ he told Money Morning readers back in December.
Righto then. So hold off on your gold buying spree until it takes a little more of a belting.
But what can you do right now? Active investors don’t sit on their hands and wait for the right time. Because there never is a perfectly right time. There are always some risks. However, regardless of risks, there are times to invest in the right opportunities.
In Thursday’s Money Morning, Kris Sayce wrote:
‘…it’s a circumstance we’ve seen many times before over the past twenty years.
‘There’s no doubt that governments have put the ‘inflation train’ back on the rails. That means more stimulus and money printing for years to come…
‘And boy do we like what we see in terms of long term investment opportunities. Until the day of reckoning arrives (for central banks) investors have a great opportunity to make the most of some potentially spectacular returns.’
For now, central bankers will continue to fiddle with markets and befuddle investors. And if they’re going to fill the stock market with cash, it’s worth paying attention to the opportunities available to investors to take advantage of this quantitative easing rally…
Shae Smith
Editor, Money Weekend