Sunday, March 22, 2009

With the FED and their announcement this past week, people (even other countries) are starting to worry about inflation. When these worries start to take presedence, then one can anticipate what kind of moves are to be expected amongst different avenues of investing (or where money can be put to work).

John Jagerson explained this pretty well and I'm just gonna try and repeat what I heard in simpler terms (assuming "simpler" is a word):

With the FED's announcement this week, they said that they were going to "increase their balance sheet". More money is gonna be pumped into the system. When the 'pumping of money' is announced then one can expect a few things to happen.

1. The USD (U.S. Dollar) will go down in value, this is a simple concept to understand ("When inflation sets in, the Dollar doesn't win").
2. Gold goes up in value. Gold and other commodities are an inflation hedge.
3. Bonds go down in value when you anticipate inflation.
4. Equities, typically move inversely to Bonds when inflation 'comes about'.

Again, that's a typical/simple understanding of the relationships. However, this happens in a NORMAL market environment, but for those of you who haven't noticed, we're not in a 'normal' market. Not even close.

That being said, look at the chart below. This shows the 4 points above. I used the EUR/USD currency pair to show what happened to the US Dollar (top-left); the SPX for the equities (top-right); GLD for gold (bottom-left); TLT for the Bonds (bottom-right)...This chart is an intraday chart and shows how the market reacted to the Fed's news that they were going to "increase their balance sheet"...

Notice anything different? Or notice any relationship difference than what I explained above? Everything freak'n shot higher!!! Bonds especially and their yields all made BIG moves. As John Jagerson said, 'when this relationship breaks, you CAN expect volatility'.

That's exactly what I'll be looking for.

Happy Trading!

-Matt J