Where You Can Invest to Profit
From the Flood of Liquidity
Friday, December 2nd, 2011
By Sasha Cekerevac for Profit Confidential
As the current political and financial crisis around the world continues to get worse, there are signs that lead me to believe that certain policies will be enacted, and we can profit from them.
Profit Confidential has been alerting our readers to the growing financial crisis in Europe for a long time. Their problems are on top of the financial crisis in the U.S. With continued slow growth, high unemployment, and politicians who bicker and fight instead of trying to help the average citizen, this leaves many investors worried about their hard-earned money.
The truth is that investors should be worried about their assets during a financial crisis. Making money is never easy, especially in an environment that isn’t showing a lot of promise for the future. Then you add in the political battle between Republicans and Democrats, fighting with each other as average Americans suffer. According to the U.S. Department of Agriculture, one in seven Americans uses food stamps! If that isn’t a financial crisis, I don’t know what is.
As Profit Confidential has pointed out before, this lackluster growth will spur the Federal Reserve, as well as other central bankers, to pump more stimulus into the economy and dig its way out of this financial crisis. We just received word that the Federal Reserve, European Central Bank, Bank of England, Bank of Japan, Bank of Canada and the Swiss National Bank are coordinating to lower what are called “swap rates.”
These are the rates used for financial companies that require emergency funding. This reduces the cost of funding the daily operations for big banks. These are only short-term obligations. A big bank may need to raise money for a week, so this lowered rate is a little bit of help, but does nothing to solve long-run structural problems.
This coordinated effort by the Federal Reserve and other central banks is similar to using a band-aid to cover a shotgun wound. This doesn’t fix the long-term problems of the world financial crisis. Knowing this fact, the Federal Reserve and world central bankers appear to be laying the groundwork for more liquidity on a larger scale.
Where can you invest to participate in the oncoming flood of money? The more money that is flooded into the system by the Federal Reserve, the higher the prices of commodities will go. This happens for several reasons. Higher levels of monetary stimulus create more money, which ends up as inflation. Inflation, by definition, is the increase in prices and loss in the purchasing power of money.
We are already seeing higher prices in gold, food and oil. For an in-depth analysis of the oil market during this financial crisis, read the article I wrote entitled, What Oil Prices Are Telling Us About the Market.
The loss in the purchasing power of money basically means that, since there are more dollars in circulation, each one is worth less. This is also a loss of faith in the government, as people see their hard-earned dollars buy less and less goods during this financial crisis. The difference between paper money and commodities is that you can’t just push a button and “create” more gold, silver or oil.
Looking at the level of monetary base, the amount of money in circulation, charted against the price of gold, you will see the same basic picture, both rising together. If we are about to feel the impact of a globally coordinated monetary stimulus by the Federal Reserve and other central banks, this will be a strong wind pushing up commodity prices. Except this wind will have the intensity of a hurricane.
Just remember: you need more protection against a hurricane than just an umbrella!
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Tags: credit crisis, Europe, federal reserve, financial crisis, oil prices
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Sasha Cekerevac, BA Economics with Finance specialization, is a Senior Editor at Lombardi Financial. He worked for CIBC World Markets for several years before moving to a top hedge fund, with assets under management of over $1.0 billion. He has comprehensive knowledge of institutional money flow; how the big funds analyze and execute their trades in the market. With a thorough understanding of both fundamental and technical subjects, Sasha offers a roadmap into how the markets really function and what to look for as an investor. His newsletters provide an insider’s look at what the big funds are planning and how you can profit from it. He is the editor of several of Lombardi’s popular financial newsletters, including Payload Stocks and Pump & Dump Alert.
