Posted By:  Matthias Paul Kuhlmey

Arguing about money is not only what (some?) husbands and wives do. These days, entire countries are busy fighting over money. Already in 2010, we had pointed to the emergence of currency wars among Sovereign Nations, involving the utilization of competitive devaluation tactics to decrease the relative value of their national currencies – this mainly in an attempt to stay competitive in global export markets, or at least to have a meaningful shot at this business again (wink, wink, U.S.).  

The FED has often been accused of being at the forefront of this ongoing currency conflict, as liquidity unleashed through Quantitative Easing (QE) encouraged risk-taking in global markets, leading stocks higher and also currencies, mainly those of emerging economies, while at the same time the Dollar was falling. One thing lead to another and inflation in food and energy compromised the consumer worldwide:  Monthly food price inflation in China still runs in double-digit terms, and 4-Dollar Gas at the pump (e.g., in New York) has hurt the U.S. consumer. To be clear, QE2 killed the prospects of a global recovery – or at least the illusion of it. Mr. Bernanke and his team were simply wrong. 

Above in mind is most likely the reason why the FED did not add more “QE-lixir” after Wednesday’s Committee meeting (i.e., specifically liquidity), but instead took on Operation Twist (OT). OT is more or less a balance-sheet swap, selling short-dated securities and buying long-dated ones, instead. When also considering the FED’s support of the mortgage market by reinvesting proceeds of maturing debt into Mortgage-Backed-Securities, rather than Treasuries, OT is more or less a subsidy for banks – these, without question, need more time to repair their balance sheets, in order to “muddle through.”

We wonder why investors are so nervous looking at markets; most of the money has been lost already, but this has gone unnoticed by many. When accepting, for example, that the S&P 500 is a monetary unit that can be converted into necessary commodities, including food and energy, real purchasing power has been eroding severely – losing somewhere between 50-70% since the melt-down of the dotcom bubble in 2000/2001, followed by the Credit Crisis in 2008/2009. Did investors really think that pets.com (the Amazon-like store for pet supplies) or Miami Condos were true stores of value? No worries, Mr. Greenspan did not get it right either; in 2005 he did not see a nationwide bubble in housing, and in 2008 he called for the bottom in U.S. real estate. 

All aside, we are concerned that the current downturn could gain more momentum; this stated, our clients are well positioned. HighTower, as a firm, was designed to give advice, not to sell products. Consequently, we have not had to take unnecessary risks. Expect more volatility to come, and please ask us for a second opinion on your investments. We are here to help.