The major news this week was the Fed announcement which stated that they were not going to taper and slow down the 85 billion dollar injections into the financial system. Currently the Fed is in between a rock and a hard place. If they taper the economy will continue to stagnate and is likely to collapse but if they continue with quantitative easing the dollar will being to collapse. (The sound issue is known in the video for some reason there was a corruption when the video was uploaded to YouTube).
- Surprise announcement caused global stock markets to hit record highs
- The Fed’s decision affects Asian shares as they jump and dollar falls
- Actual response of Fed decision which is opposite what market’s expected a day later
- Who benefits from The Fed decision and who doesn’t
- Explanation why The Fed made it’s decision to leave stimulus intact
- How the world reacted to the decision out the FED
- The original expectation for Gold based on Fed decision
- The actual reaction of US markets which were opposite expectations (declined day after)
- How Fed decision is causing currency volatility
Hey traders/investors. This is Marcello with The Day Trading Academy doing this week’s investment insights in terms of what’s going on in the investment world and what you need to pay attention to for both day trading and investing.
The biggest part of news this week was the FED announcement. They decided to go ahead and maintain present course which means that they were not going to taper the actual purchases or asset purchases. I know we talked about this a little bit before but I think it’s really important to understand exactly what the government is doing in order to understand the context of what’s going to happen in the future, as well as the potential for economic growth.
Now what’s happening is they are purchasing or injecting 85 billion dollars a month into the financial system. 40 billion of those are in mortgage back securities and then 45 billion of those are actually treasury bonds or treasury notes. Now one of the things that a lot of us don’t understand in terms of the financial market is this kind of jargon and lingo like “notes” and “bonds” so to put it simply, the government is spending 45 billion dollars a month to buy its own debt. And this is very significant because if we put this into context in terms of what that does to the economy, this is one of the reasons why the stock market, for example has gone up.
Germany, in the 1920s, Zimbabwe, Argentina – all of these economies, before they went into chaos and had a lot of trouble, did the exact same thing where they started doing these asset purchases over time. And in Zimbabwe, you can actually buy a 100 trillion dollar note. I was there a few years ago and that’s how bad the inflation there is now. So it’s really important to be able to understand that this has happened before with other countries and now the United States is doing the same exact thing. So there’s no reason not to expect the same outcome.
What the US government wants to do and what it wants to happen, is it wants to give all this money to the financial system in order to spur a growth. Now the banks are receiving 40 billion of that with the mortgage back security purchases, and then the 45 billion goes to the treasury notes. And what’s happening is the printing of all this money goes to the emerging markets. Instead of using the money to give loans to small businesses and people to be able to go ahead and spur the economy, these banks that are too big to fail are actually investing that. They’re sending that over to emerging markets. The emerging markets now are starting to rely on that money. One of the reasons why the stock market, for example, keeps going up and is making new highs, is because that’s where the money is going.
The majority of these places where the money is going are things like derivatives, overseas markets, the stock market, and even in commodities. If you take a look at the volume of the behavior or movements of the market, you’ll see that we’re getting some pretty erratic jumps in the commodities because that’s where part of the money is going. One other thing that’s very important to understand and also very risky are the derivative investments that a lot of these banks are making. These banks are massive, they’re too big to fail. And a lot of them think “If it’s a bad investment it really doesn’t matter because the government is going to come and bail us out”. That’s what happened last time.
So for those of you that don’t know or understand what derivatives are, essentially there’s nothing tangible behind these assets. They’re basically speculatives. So if they lose the investment, that’s it. Money’s gone. So it’s important to understand that. And all of this transfer of money, and the injection of the money into the financial system is creating a new bubble which is the bond. It’s going to be a bond bubble. You’ve heard probably a few people talking about that. So what’s happening now essentially is that the FED is in between a rock and a hard place. It’s very similar to a drug addict.
If you take a look at what happens to the drug addict, eventually, they either die or they go to rehab. And right now we’re reaching the point where that drug, which is the injection that the FED is putting into the economy in terms of the 85 billion dollars a month, we’re reaching a point where it’s not being as effective anymore. And you can see that in the behavior and the reaction to the market, for what happened to the FED this week. You’ll see that right when the FED made the announcements when they’re not going to taper anymore, the market spiked. But the next day, you’ll notice that gold went down, stock market went down, silver went down, and it’s really important to be able to understand that people are starting to notice, people are starting to realize, that these injections, the quantitative easing, what the FED is doing, is not being as effective as it used to.
So, we’re still expecting that market correction eventually. There has to be a correlation between economic growth and the supply of money. Just because the stock market is going up, the economy is not growing pretty much. It’s growing at a very, very slow pace. And the amount of gains that we see in the stock market have to correlate with that economic growth. The surge in the stock market is not reflective to the economic growth. It’s not reflective to the recovery. So it’ll be interesting to find out what happens in the future here. We’re still expecting a very major market correction.
That’s one of the reasons why we love to day trade because obviously, at the end of the day, we’re not risking any of our money in the stock market. We’re clean, we can go out, I’m here in Colombia on some projects. We’re heading to Barcelona tomorrow. One of our traders is heading to Spain as well.
So stay tuned in the future guys. One of the things that I think will be really interesting to talk about is whether the FED actually has a choice. Whether the US government has a choice in actually doing these FED purchases. It would be best for them not to do it but in reality, do they really have a choice? So stay tuned, we might keep doing these weekly or bi-weekly. Next week obviously we’d be in Barcelona so we’ll report to you then. See you later. Ciao!