By MoneyMorning.com.au
According to online news service, Market Watch, Grantham ‘…expects another leg down for the U.S. stock market, one where shares could stay low priced for years while U.S. economic growth plods along at maybe 2% annually.’
After Thursday’s trading in the U.S., you’d be forgiven for thinking the next ‘leg down’ for the market has already started.
Mr Market didn’t like the US Federal Reserve’s plans for ‘Operation Twist’.
‘Operation Twist’ involves the Fed disposing of bonds maturing in the next two years, and buying bonds with a longer-dated maturity.
The aim is to drive up the price of those longer-dated bonds. And because bond prices move in the opposite direction to bond yields, it means the yield (interest rate) will fall… this is exactly what the Fed wants.
The idea is lower interest rates on long-term bonds will lead to lower rates for mortgages, car loans and other debt. (Interest rates for these loan types use the US 10-year bond as the reference interest rate).
Basically, Dr B.S. Bernanke is telling Americans to borrow to save the economy.
But this isn’t the first time the Fed has tried ‘Operation Twist’. It did something similar in the 1960s. Did it work then?
According to the Guardian newspaper in the United Kingdom, ‘The last time the Fed tried something similar was in 1961, when it managed to lower long term interest rates by only 0.15 of a percentage point.’
Short term rates in the US are almost at zero now. And even the 10-year bond yield is below 2%. So it’s doubtful ‘Operation Twist’ will make a big difference.
But is it better to have some intervention than none? Again from the Guardian:
‘With unemployment still high, households struggling to pay off debts and most banks refusing mortgage applications, whatever the interest rate, it seems unlikely that Operation Twist alone would make much of a difference.’
If you take the stock market as an indicator of success, the market agreed with the Guardian. At one point, the Dow Jones Industrial average was down over 500 points on Thursday night.
Stephen Roach, a non-executive chairman of Morgan Stanley Asia told Bloomberg BusinessWeek, ‘The unconventional tools that the Fed is trying to convince the markets will work failed in Japan and they won’t work in this economy either.’
Roach isn’t the only one who believes the Fed’s policy is intervention for the sake of it.
Alan Blinder, a professor at Princeton University, feels that by starting Operation Twist, Bernanke is ‘…throwing sticks and stones and pea-shooters and BB guns and whatever he’s got at the weak economy in the effort to make marginal improvements.
‘I don’t expect any miracles from it and frankly neither do they.’
The fact is this is a volatile market. And as the uncertainty increases many investors are left wondering how to grow their wealth when markets are falling.
Last week, Dan Denning, editor of Australian Wealth Gameplan told his subscribers:
‘…the end of the financial world as we know it doesn’t mean you can stop thinking about how to preserve and grow your wealth.’
Dan says investors should have a ‘Permanent Portfolio‘. It’s an idea first put forward in a book by Harry Browne in 1970!
And although the book is more than 40 years old, the ideas are still relevant.
Dan wrote. ‘[It] identified four basic economic cycles: inflation, deflation, prosperity and recession.
‘…the book [is] a how-to guide for investing during times of monetary instability.’
It seems like a perfect time for this type of investing.
Dan says:
‘The Permanent Portfolio was instigated as a response to unstable policy and unsound money. It’s entire performance history coincides with the emergence of a global dollar standard and worldwide credit bubble.’
‘In other words, it was an investment strategy largely designed to deal with monetary debasement.’
Central bankers and policy makers are eroding your wealth. So it’s time to protect and grow your dollars.
Both Operation Twist and the Permanent Portfolio are old ideas. But only one of them is a good old idea… an idea that can help you protect your wealth.
Shae Smith
Editor, Money Morning
P.S. – The Permanent Portfolio isn’t a new idea. But it could be the way to secure your wealth long term. Over the next few months, Dan will show his subscribers how to assemble a Permanent Portfolio of their own. Click here to see if the Permanent Portfolio fits your investment strategy.
How the ‘Permanent Portfolio’ Can Protect You from Central Bankers
