At the Fed’s last meeting, Bernanke and company decided to keep the monetary throttle pegged. Apparently, the massive real-estate bubble inflated by an ultra-loose monetary policy that almost caused a collapse of the global financial system hasn’t changed the Fed’s view on asset price inflation. The Fed continues to cite subdued inflation and low rates of resource utilization as reasons to maintain its ultra-loose monetary policy. Bernanke and company are, of course, completely ignoring asset prices. Gold is at a new all-time high, oil is up 155% from its low, the S&P 500 is up 57% from its low and now overvalued, and the trade-weighted dollar index is down 12% from its February high. The valuations on some assets are bordering on bubble territory. The Fed is once again guiding the U.S. economy down a treacherous path of asset price inflation. This is a misguided strategy. There is danger lurking for millions of investors who do not recognize that the recovery in financial markets is grounded not in fundamentals, but in easy money. I would advise you to remain skeptical of the stock market rally. Continue to invest defensively.
Jeremy Jones, CFA
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