The Fed's Printing Press Creates Our Opportunity
By Tom Dyson
December 22, 2008
Gold has risen $105 in the last 10 trading sessions. It's rising in response to a new and extremely dangerous tactic being employed by the Federal Reserve.
The U.S. dollar moves inversely to gold. Gold is sort of the "anti-dollar." Of course, the dollar is falling while gold trots higher. As you can see, the dollar rolled over last week and has started falling again...
Today, I'm going to explain the Fed's tactic and show you how you can use it to your benefit...
Last year, our economy entered a weak patch. And this year, the entire banking system fell apart. The Fed decided it could "improve" the situation. It started making adjustments. Cutting interest rates was the first step the Fed took. In normal circumstances, lowering interest rates fires up the economy. It encourages people to borrow and discourages them from saving.
Not this time. The balance sheets of banks and consumers were so rotten, lower interest rates made no difference. There were no lenders and no borrowers.
So the Fed tried a second strategy... swapping high-quality government bonds for junk and lending money against junk collateral. It thought cleaning up the balance sheets of the banking sector would bring back confidence and lending would resume.
This didn't work either. There were still no borrowers and lenders willing to transact with each other.
Webster's dictionary defines inflation as an increase in the supply of money and credit relative to the available supply of goods and services, leading to a general rise in prices.
Notice the definition includes money AND credit. Credit is the right to access money. It's not the money itself. It's the difference between a platinum credit card and a briefcase full of hundreds.
The major role of the Fed and the banking system is to promote credit, which is what it was trying to do with strategies one and two. But the Fed can't force people to borrow and lend.
So two weeks ago, the Fed pushed its lever up a notch... and wheeled out the most powerful stimulus in its arsenal... "quantitative easing."
Quantitative easing is when the central bank targets the money supply instead of the credit supply. In other words, instead of trying to get people to borrow and lend, the Fed resorts to simply shoveling money into the economy. The central bank does this by creating money out of thin air and using this money to buy assets from banks.
The Fed is reducing the supply of assets and increasing the money supply. It's pure hyperinflation. Do you think it is coincidence gold started its rise the exact day the Fed started its new strategy?
As I see it, this new tactic is extremely dangerous. All government intervention comes with unintended consequences. I'm particularly concerned about the dollar. The Fed is debasing the dollar so people would rather spend it than save it. It's like making someone do business with you by holding a gun to his head.
In the past few months, institutional investors have panicked into cash, T-bills, and Treasury bonds. When they realize the Fed is debasing the dollar, they will panic again. This time, they'll look for anything of real value they can buy with their dollars. After gold, high-quality American stocks and corporate bonds will be the first investments they look at. That'll stabilize the stock market. It may even cause the market rise.
My favorite way of profiting from the Fed's printing press is writing covered call options on the strongest, most profitable American blue-chip stocks. You can earn 20% income from this strategy. The beauty of this strategy is, it's incredibly safe. This market is poised for a rally, but we're not betting on one. To make our 20% income, we don't even need the market to rise. All we need is for it to stabilize.
And with the Fed pumping money into the system, that's about to happen.
Good investing,
Tom
Editor's note: Tom Dyson is a regular contributor to DailyWealth, a free investment newsletter focused on the world's best contrarian opportunities. We write with a simple belief in mind: You don't have to take big risks to make big money with your investments.
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