It shouldn’t have been breaking news yesterday…but it was. According to a Wall Street Journal Special Report, the Fed is hotly contemplating another move toward easing as early as next week, during its July 31 – August 1 meeting.
For those faithful readers, this should come as no real surprise as we have maintained for months, neither the Fed nor the markets appreciate a strong dollar. In this world economy a strong dollar is to corporate profits as bug repellent is to bugs. And as to debt, paying back old debts with dollars worth more than those borrowed puts one on a fast track to bankruptcy.
I know this notion defies reason, but consider this. The more a dollar is worth the fewer you earn. Just ask Apple. And while the cost of food and energy may fall in proportion to the dollars earned, the cost of servicing debt skyrockets. In the case of inflation, the opposite holds. You earn more dollars that are worth less but regardless of the value of the dollar you earn after you borrow money, one dollar 5 years from now still pays one dollar of debt from 5 years ago.
And who is the largest debtor in the world? You got it. It’s us…as in U.S. If deflation rears its ugly head and the economy/incomes contract accordingly, it will become increasingly difficult for us to pay off foreign debt. This is what the Fed is trying to avoid. Inflation is the Fed’s friend.
Corporate America also embraces a weaker dollar and inflation. It boosts corporate profits on exports and just as it is the case with government, rising inflation makes for an easier time of paying back corporate debt. Hence, upon news from the Wall Street Journal yesterday, of potential Fed actions, in less than an hour the stock market recovered nearly half its losses from its lows of the day.
Gold prices also reacted decisively, rising to even on the day and then exploded $30 dollars higher today. So, if the Fed really is about to make another move to ease, where should you place your bets? Stocks or gold?
Since the onset of the last crisis marked by the collapse of Lehman on September 15, 2008, the Dow is up 11%. This, after trillions of dollars of stimulus. And gold? Gold has doubled – even after a major pullback off record highs. Since the crisis, Gold has clearly beaten stocks. Is the Fed now gold’s best friend?