By Paul Tracy
The End of QE2
An Investment in Higher Interest Rates
An Uncertain Future
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4 Ways to Protect Yourself From the Next Financial Crisis
I paid some of the sharpest financial minds in the business $1.3 million to find the stocks I tell you about here. I’m convinced they could save the lives of thousands of investors. I’m not taking any chances with losing my money. So I’m buying them right now to save my own skin from the market collapse many economists believe could happen any day now.
Editor’s Note: Today’s issue of Cabot Wealth Advisory is written by Paul Tracy, co-founder of StreetAuthority and chief investment strategist of StreetAuthority’s Top 10 Stocks (not to be confused with Cabot Top Ten Trader, which is published by Cabot). Today he discusses what could happen now that the U.S. government’s quantitative easing program has ended.
The Fed’s massive quantitative easing program ended on June 30 and debt problems in Europe are coming to a head. Here’s how to protect your portfolio and even maximize the mania–in your favor.
Let’s be frank, right now isn’t an easy time to buy stocks. And I wouldn’t tell you otherwise.
According to the U.S. Debt Clock, one of the most widely cited tools to measure our nation’s ballooning debt load, the U.S. government owes $14.3 trillion to our creditors.
That’s nearly $130,000 per taxpayer.
And according to the Federal Budget released by President Obama in mid-February, we’re currently on pace to add $1.65 trillion to our national debt this year alone.
The Federal Reserve’s massive quantitative easing program ended a couple of weeks ago … effectively taking away major support from the Treasury market. Meanwhile, financial problems in Europe are coming to a head and there is still a sluggish economic outlook. Stocks are facing real threats.
The most nerve-wracking thing is that we’re in a situation we’ve never seen before.
Put simply, the central bank has bought $2.8 trillion in mortgage and Treasury bonds since 2008. No single investor in history has ever bought that much … of anything. That artificial demand–academically called quantitative easing–has pushed interest rates to record lows in an attempt to spur the economy.
I recently added 150 shares of the iPath U.S. Treasury Long Bond Bear ETN (DLBS) as the first recommendation in the portfolio of StreetAuthority’s newest advisory–Top 10 Stocks.
This security rises when interest rates rise, which I think will happen as the Federal Reserve pulls out of the market where it’s been buying an estimated 70% of all Treasuries.
But then what? After all, you don’t buy nearly $3 trillion in securities … turn off the money flow … and only see a slight uptick in interest rates. What else could happen?
I’ll be honest. No one knows for certain, but there are some likely outcomes.
My Top 10 Stocks team and I have been doing a bit of research on what could happen. Unfortunately, it’s not a rosy scenario. But I want to make sure you’re prepared for what could happen AFTER in the weeks and months ahead.
Like I said, what we’re seeing is unprecedented.
Japan is really the only “case study.” The Japanese introduced quantitative easing in 2001, and ended the program in March 2006. The country was able to flood the markets with liquidity … keeping interest rates low, just as the Federal Reserve has done here.
But what happened to stocks when that cash flow stopped? You can see for yourself in the chart below …
Soon after the end of the program, the Japanese stock market took a sharp turn lower, before rebounding … only to fall again with the global recession.
But the scary part is that unlike the United States, Japanese stocks haven’t rebounded since. Today, more than five years after the end of Japan’s quantitative easing experiment, stocks are 40% lower. Meanwhile, as the Wall Street Journal says, “The country remains mired in deflation, a general decline in wages and prices that has crippled its economy.”
That doesn’t necessarily mean we’ll see a crash … but I don’t think I’m out of line when I tell you Japan’s past does make me nervous about the United States’ future.
All the best,
StreetAuthority co-founder and chief investment strategist of Top 10 Stocks
P.S I urge you to learn more about this by reading the details in my newest advisory. You can view it here.