What’s wrong with this picture
So much of the market turmoil right now is centred on one thing… when will the US Fed raise rates because ‘everything is awesome’? Simplistically they used to say they would when they reached ‘full employment’, nominally around mid 5’s%. They are there now but as we discussed Monday, that rate is affected by a lot of people just giving up on working (near 40 year low participation rate – which by the way is the same reason the Aussie rate dropped yesterday…). They also talk about when they get to their target 2% inflation rate. They are well below that currently but arguably heavily influenced by low oil prices. So why aren’t they raising rates? Maybe it’s because they have over $4t on their own balance sheet and the country has over $18t and they don’t like the bond price and interest cost implications? In today’s radio Weekly Wrap we revealed Japan is spending 43% of all tax revenue on servicing its interest. That could be the US. Maybe because the truth is not as great as the headlines suggest? Sometimes when investing you need to independently step back and look at what’s going on and ask yourself “Is this real… do the fundamentals support my investment?” It is most certainly what the Fed is doing and hence not raising rates – but they have to give the impression they are close to keep selling the ‘all is good’ message. The graph below gives an insightful snapshot of the disconnect your gut is no doubt telling you. (Check out todays Weekly Wrap to learn just how much of that S&P500 price is through companies buying their own shares using the very same low rate debt). Now you could well profit from ‘not fighting the Fed’ as they say and play the sharemarket game for a bit longer. All we are suggesting is that common sense says this must end at some time and end very badly, so a hedge or insurance may be quite prudent. Gold and silver are the world’s oldest and most proven safe haven hard asset with no counterparty risk (as opposed to a bond say..).