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The FED, The Dollar, and Opportunities

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My post for today was supposed to be a personal reflection, but in lieu of that, I’m going to lay out my thoughts on the market and the economy. Which includes the FED, the dollar, and inflation. In addition to that, I want to explain where I see risks and opportunities right now.

The dollar

We can expect the Federal Reserve to continue an accommodative monetary policy. They will invest in the fixed income market and they’ll resume the low-interest-rate stance.

If they continue this response to the Covid crisis, the dollar should go down in value. There are some risks and opportunities that arise if that happens.

Gold and cryptocurrencies should increase in value. A devaluing in the dollar is, normally, the right landscape for “alternative currencies” to do well.

International securities, especially emerging markets, do well when the value is priced lower. A large majority of international transactions take place using the USD. The value of their home currency goes up in relation to the USD.

The technology sector also has a negative correlation to a falling dollar. When the dollar goes down, that sector tends to outperform.

If the dollar, indeed, goes down look at these areas for possible investment opportunities.

The FED

As I mentioned earlier, the FED will continue to create an accommodative environment for the economy…until they don’t.

At some point, the recovery will gain momentum. GDP will go up and the population will gain confidence in that recovery. At this juncture, inflation will pop onto people’s radars.

If inflation runs too hot, the FED could possibly stop, or reduce, QE. They could halt the bond-buying program and they could raise rates. If that happens, keep your eyes out for a pullback.

We saw this happen at the end of 2018. The FED started raising rates until they went too far, and we had a 20%-25% decline in Q4. Then they reversed course and began easing again. We had a run-up in the market until March of 2020 when Covid hit.

Long term

I believe tech and healthcare will be the two sectors to watch over the next decade or more. With technology getting more advanced every day, investment opportunities will present themselves in these two areas.

Green energy, especially with the incoming administration, is also an industry with big potential. Technology will play a large role in the advancement of renewable energy.

My biggest concern

And I’ll preface this by saying I’m concerned because I truly don’t know the implications of it. MMT looks as likely as ever at this point.

The favorable stance by the FED plus the democratic party holding the House, the Senate, and the Presidency leads me to believe printing money is going to pop off.

An aggressive agenda to provide relief for Americans struggling because of Covid, a push for expanded Medicare/Medicaid benefits, possible student debt relief, as well as other initiatives.

It appears that reducing the national debt is not a concern. To be fair, it wasn’t a concern for the Trump administration either.

The bill comes due for everyone, and if other countries (namely China) are no longer buying US Treasuries like they were, I do not know how we can fund policies, branches, or even service the existing debt. Only time will tell.

Conclusion

I will close by saying that these are my opinions. Granted, I do a lot of research to come to these conclusions, but what I said above are still my thoughts and not foregone conclusions. Do your own research.

Related reading:

How to Beat Inflation with Investment

What Makes Gold so Valuable

 

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Federal Reserve Report: Hang On For Rough Ride…

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Here’s a depressing recent headline. Today the Federal Reserve Bank of San Francisco released a report predicting that the financial markets are unlikely to be strong for the next…drum roll please…16 years!

Can this be accurate?

The report, titled “Boomer Retirement: Headwind for U.S. Equity Markets?” illustrates long-range, historical data which suggests that as the boomer generation moves into retirement, they’ll pull an increasing amount of money out of equity funds.  This can only mean increased pressure on stocks for years to come.

This is classic ‘supply & demand’ economics at work here, folks. 

Roughly 10,000 baby-boomers turn 60 EVERY DAY, a trend that will continue for the foreseeable future.  As each of these 10,000 individuals leaves the workforce, they need money to spend in retirement.  Where will their meals come from?  That’s right.  Their spending money will come, in part, from investment portfolios.

As the report points out “…to finance retirement, they are likely to sell off acquired assets, especially risky assets.  A looming concern is that this massive sell-off might depress equity values.”

Take a look at this projection:

According to the research in this report, P/E ratios, an indicator of potential stock prices, is slated to continue downward through the early 2020s before rebounding in the latter half of that decade.

“Figure 2 shows that P/E should decline persistently from about 15 in 2010 to about 8.4 in 2025, before recovering to 9.14 in 2030.”

The report continues: “The model-generated path for real stock prices implied by demographic trends is quite bearish.  Real stock prices follow a downward trend until 2021, cumulatively declining 13% relative to 2010…real stock prices are not expected to return to their 2010 levels until 2027.”

Ouch.  That could sting a little.

So what does this data imply?

Should we all be in bonds until 2030?  Quite the contrary.  There will likely still be bullish trends throughout the upcoming cycle, so it pays to be vigilant. 

Instead, I believe this heralds the end of “buy and hold and you’ll be fine” investing.

This mean you’ll need to be cognizant of market trends and invest accordingly.  What does your advisor think about this report?  In all likelihood, he’s never heard of it, and will probably say something like “Just invest and stick with the plan, and you’ll be OK.”

You can do better.  If you just pay attention to the signs, you can profit from both sides of the market, both the ups and downs.  You just have to pay attention.

If you’d like to read this report for yourself, it’s available here or type in http://www.frbsf.org/publications/economics/letter/2011/el2011-26.html to read for yourself.

I’m interested in your thoughts…post your comments below.