Lets profit from Bernanke’s asset price inflation

09/13/2012 – Today’s move by the Federal Reserve was a dramatic move, yet completely in alignment with its other recent and significant policy decisions.   Here are the most critical passages from the press release:

“The Committee agreed today to increase policy accommodation by purchasing additional agency mortgage-backed securities at a pace of $40 billion per month. The Committee also will continue through the end of the year its program to extend the average maturity of its holdings of securities as announced in June, and it is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities.These actions, which together will increase the Committee’s holdings of longer-term securities by about $85 billion each month through the end of the year, should put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.  …To Support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens. In particular, the Committee also decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that exceptionally low levels for the federal funds rate are likely to be warranted at least through mid-2015.”

The Austrian economist Ludwig Von Mises stressed that inflation is not neutral, it does not effect each market participant equally.  In general, those that receive the new money first, and those that own real assets, profit at the expense of those who receive the new money last, and those who hold paper-money denominated assets (such as bonds and insurance contracts).

Make no mistake – Though asset prices are not included in the CPI or other measures of inflation, what the fed is creating a massive monetary inflation that is targeting financial assets.  This inflation will filter into the “real” economy via the capital markets and reduced borrowing costs.

Though I am in general a libertarian/conservative, the left has a point when they suggest that some of our government’s policies benefit the “rich” at the expense of the middle class and working poor.   Asset inflation funnels money into the pockets of asset holders (The wealthy) at the expense of those who own nothing, or only own paper-money denominated assets like savings accounts or fixed income annuities (retirees).

When the money finally makes its way down to “consumers,” they will bid against each other for “cost of living” goods, which will trigger CPI type inflation.

For our purposes, the key is understanding that the fed can control some of the levers, but it cannot control them all simultaneously.  They can manipulate interest rates and asset prices, but then their hand is off the “dollar” lever and the dollar will be left to the punishing hand of the market.   Yet, at the moment no country on earth wants a relatively stronger currency, as most all nations are up to their eyeballs in debt and looking to pay it back with cheap money.   A weaker dollar will ultimately push other central bank to follow (or continue) in the fed’s aggressively inflationary path.

I think insights from one of Warren Buffett’s shareholder essays can provide solid guidance when choosing long-term stock investments that will benefit form the current asset-price inflation ( continued here)

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