Bernanke Plays a Little Slap and Tickle

-Ben warns even as things look better

Just when things start to look up, Ben Bernanke gives us a little slap of reality, warning that things don’t look so rosy down the pike and a little tickle in the form of a probable QE3 to soothe our souls.

The markets have responded to the impressive string of better than expected economic news over the last few months. It’s hard to believe that all that many could think that it was truly the end of the great recession, (I know it officially ended long ago but it doesn’t feel like it!) but it gave hope that perhaps at the very least a firm recovery was underway. Bernanke’s warning and subsequent continuance of QE Mini-Me simply confirms the case I have been making that the economic strength was simply the last vestiges of QE2 and without further stimulus, the economy would again turn south.

To my surprise however, Bernanke and the Federal Reserve Board laid out the groundwork for further stimulus now, before things got bad again, rather than being reactionary. To that I give him credit because the latter would have come too late, as there would have been too much lag between the end of QE2 and when we would start feeling the effects of a QE3 which is typically 9 months later. They are going to keep interest rates at nil for an elephants lifetime they announced, and if inflation is below their target rate of 2% when the slowdown starts, they will begin a new round of asset buying or an official QE3… which I would bet my Superbowl winnings on, had my team not broken my heart.

Now, I know you may think there’s much more inflation out there, but in reality we are actually battling “deflation”. Take a look at a recent Bloomberg article:

Huggies Price Cut Shows Why Bond Market Backs Bernanke QE3
Feb. 6 — Procter & Gamble Co.’s failure to raise the price of Cascade dishwashing soap shows why investors are buying Treasuries at the lowest yields in history, giving the Federal Reserve more scope to boost the economy. The world’s largest consumer-products company rolled back prices after an 8 percent increase lost the firm 7 percentage points of market share. Kimberly-Clark Corp. started offering coupons on Huggies after resistance to the diapers’ cost.

Let’s face it, with interest rates so low the Fed is going to keep borrowing for Quantitative Easing programs until the cows come home… which is essentially when the bond market stops allowing them to… and they are going to have to for a long time. The demographic overhang of 92 million baby boomers past their peak spending years, the massive over-indebtedness of the American consumer just screaming to deleverage and a powder keg in Europe set to explode in a matter of months is a Gail force headwind that will take years to overcome. If you are interested in learning more about these issues and more affecting our economy, be sure to pick up a copy of Facing Goliath: How to Triumph in the Dangerous Market Ahead, it is written in plain English and is easy to understand, a must read for every investor.

Regardless of the slowing economy, or even a European implosion led by Greece, a full blown QE3 will push the markets higher. Although, stocks are seriously due for a correction, a pullback probably won’t come until the market is much higher because so many people have been left behind and are just waiting for a chance to get back in. More importantly, the continuation of the rally would simply be an extension of the aging bull market and not the beginning of a new one.

In the bigger picture, the market will not likely top until the average investor, who remains unenthused, throws caution to the wind and decides to get back in. Therefore, investors must avoid complacency and remain alert for signs of a top, as this rally in our old bull market will likely be measured in weeks or months and not years. Even if you think that it won’t happen until after the election… are you willing to bet your family’s financial security on it? I’m not!

Investor Strategy
Although, you may have the feeling of being left behind or the urge to try to time the market, Invest for Need, Not for Greed. That is merely the art of getting the very best returns you need in order to succeed, with the least risk possible.

Nimble traders can take advantage of this rally, but the key is to be “Tactical” and avoid buy-and-hold (buy-and-hope) at all costs. Moderate and low risk investors, us average folk who would rather not have to work until the day we die, or lose sleep at night because of market volatility, should continue to focus on the market’s “sweet spot” which is currently income investments such as corporate bonds, preferreds and MLP’s, many yielding 8-10%. If the market does continue to rise, you’ll likely get the best of both worlds of appreciation along with a healthy dividend, but with less risk.

For those that want a guarantee of principle with a decent yield or a guaranteed income for life, there are many attractive annuities out there… several that have upside potential based on the market but with no risk of loss. If your portfolio can live with this option, take advantage of it. Why lose sleep the next time the market crashes.

Regards -Keith Springer

P.S. If you have CD's coming due, cash earning little or other accounts that are underperforming, let me know. There are some great CD alternatives and I can still get yields over 8%.