Washington is still Washington

For the past three weeks we have seen partisan rhetoric and anger from the left and right, and  a ”tax  compromise” from the middle.

We seem to have a tax cut bill for all Americans but I disagree with the term tax cut. The tax rate we pay will remain the same as last year, the year before, and in fact the same as the last eight years.

But wait!! This is still Washington and is the Christmas season for giving.  The compromise over taxes was fairly straightforward but our elected officials see the Christmas tree as the “money tree.”  These elected officials are standing in line to hang their “ornaments” on the tree.  Each ornament is decorated with a dollar sign.

At one time, these attachments to a bill were called “earmarks” but now they have a new sexier name,- enhancements. Whatever their name, they add to our deficit and are the price to be paid to get a bill through Congress.  

But, we do have a tax bill. The tax rates remain the same on all Americans but many people will be paying less in taxes this year and next year. Not because we received “a tax cut” but because our income is less, our savings provide less and many regular investment returns are not keeping up with inflation. (“There is inflation?” you ask.  Check the price of gas and food.)

 You may not be able to hang an ornament on the Washington money tree but you should take steps to develop your own “money tree.” Find and use knowledge, education and the tools available to develop your “money plan.”

 In these times of uncertainty, Depend on Yourself!!

Option Nu B

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QE2 may hurt in the long run, but could it hurt short term!!!

When the Fed made the decision to start aggressively buying Treasuries a couple of months ago, everyone understood that it could and probably would create an inflation problem for the US in the future. This is still a strong possibility and there is still much debate about it. Only time will tell the tale on that story. But, a new threat has emerged. A threat that I do not think the Fed considered could possibly turn out to be even more dangerous and occur more rapidly.

The Fed plan of buying over 600 billion dollars of Treasuries over the next 6 months was designed to do a couple of things. First, the purchase was designed to keep interest rates down with the idea that business activity and lending would benefit. Second, the purchase of the Treasuries would really put a bruising on the potential returns investors could get from Treasuries and thereby chase many out of Treasuries and into the stock market and other so called risk assets thereby helping to jump start business and the economy.

What the Fed may have missed is a combination of factors that seem to be coming together all at the same time that could now cause this plan to backfire.  Instead of chasing investors away from Treasuries, this QE2 Treasury purchase plan could lead people into Treasuries.

The first factor is something we have all noticed and experienced since the crash. Many investors are as worried about preserving their money as they are about making more money. So, security has become a much more significant motivator than ever before.  The bullish optimism that existed for many previous years still exists but is capable of quickly reversing. All it would take is a large global financial event or a geopolitical incident that negatively affects the financial markets and scares the hell out of investors.

When those types of global events occur ……European sovereign debt issue, North Korean incident, US Banking woes…..people tend to head for safety and gold is a well known safe haven. However, with all of the problems lately and so many investors continuing to flock into gold, gold itself has become very expensive and thus worrisome due to concerns of a brewing bubble.

So, investors have to find another safe haven, an asset that is likely to hold its value while other assets get hurt. They need to find an asset where they know there is a steady buyer……like the Treasury market with the Fed as the buyer. The Fed’s presence in the Treasury market with a well known, well publicized purchasing agenda would be just the thing to keep the asset pumped up, ergo…..safe!

With the current market situation and environment, the Fed’s involvement in the Treasury market could make it a safe haven for investors….the only and best, safe haven by providing a floor to that market. QE2 may draw investors in instead of shoving them out of Treasuries. The added demand could drive Treasury prices way up and create an asset bubble that many had speculated on but did not believe would happen at all let alone this quickly!