During the last week or so, a series of events have occurred that confirm that government and central-bank intervention will continue to fuel equities, commodities and precious metals to the upside while currencies lose purchasing power.
Democrats and Republicans failed to agree on meaningful measures to cut the mounting fiscal deficit. Shortly after, they agreed to maintain the Bush tax cuts for two more years and extend unemployment benefits.
These two measures combined are calculated to raise the fiscal deficit to approximately $900 billion in the next two years. That would leave the fiscal deficit at 13.6 percent of GDP. The current debt ceiling of $14.3 trillion will surely have to be raised.
How will the U.S. Congress be able to finance these enormous deficits? Interest rates in the bond market are already moving higher.
Enter the Fed. Last week, Ben Bernanke was interviewed on "60 Minutes," where he stated that further monetary stimulus is possible. He expressed his concerns regarding unemployment and that cutting fiscal deficits could hurt the recovery.
Bernanke is hinting that he will keep monetizing U.S. Treasuries to maintain the fiscal stimulus designed to bolster economic growth and combat unemployment.
Bernanke has no choice but to keep monetizing debt and devaluing the dollar since there is no political will in Congress to cut spending.
This will accelerate over time, since the United States has $111 trillion in unfunded obligations, which amount to a liability of $1 million per citizen. How else are they going to fund this other than printing money? They can’t.
On the other hand, in Europe, officials are discussing its own “money printing” scheme in order to bail out all the PIIGS through the use of the European Central Bank.
How does all this bode for the markets?
I believe the upside will continue for stocks, precious metals and commodities. The monetary fuel will keep being supplied by the Fed and the European Central bank.
Currencies, in general, will keep losing purchasing power against nonprintable assets. Also, retail investors have been pulling money out of equity mutual funds for 31 consecutive weeks and parking their money in bonds.
As the interest rates move up, causing bonds to fall, these investors will have to go back to equities. This, coupled with the constant money printing, suggest that a very strong bull run is yet to come.
About the Author: Victor Riesco
Victor Riesco, a financial analyst and trader in Santiago, Chile, works as an independent adviser and educator and operates a brokerage and trading business for local investors. Click Here
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