- Created on Thursday, 19 August 2010 19:11
- Written by Sara Nunnally, Editor, Smart Investing Daily
- Hits: 2154
On Monday, I wrote to you about the top three bearish chart patterns, and promised you three more charts today. But there's something's more important right now than knowing how to recognize an Inverted Head and Shoulders pattern. And that something could have a profound impact on your retirement portfolio.
Earlier this week, two articles were posted by the Associated Press that should have you reaching for your wallet to find out if Uncle Sam lifted it without you noticing.
Or magically replaced your dollar with newspaper...
Let me share with you a paragraph or two:
The call from business for less government has a notable exception: the mortgage market.
The Obama administration invited banking executives Tuesday to offer advice on changing the government's role in backing the mortgage market. While they disagreed on the exact level of support needed, the group overwhelmingly advocated for the government to maintain a large role in the $11 trillion market.
A rebound in housing is considered critical for a sustained economic recovery. But builders continue to struggle with weak demand for new homes caused by high unemployment and a glut of foreclosed homes on the market.
The combination of these two snippets means more of your money could be funneled by the government into the weak housing industry.
The banks want all the risk to fall into the government's hands, and on your wallet.
Why the Government's Risk Is Your Risk
So far, the government has spent $150 billion to rescue Fannie Mae and Freddie Mac. And one of the suggestions at the Tuesday meeting was for the government to "provide a guarantee that mortgage investors get paid even if borrowers default."
Where does that money come from?
Two places... Taxes and bonds. The government breaks open the piggy bank and stacks up the pennies for immediate cash injections. Or the government can raise money by selling bonds.
But here's the thing. In either case, they're using your money to make these investments. That means their risk is your risk.
And there's another risk when the government sells bonds. The increase in the debt burden through issuing the Treasury bonds leaves less money to support the economy... and it pumps a massive amount of dollars into the system.
Rates on 10-year notes have fallen drastically over the past year. Indeed, they haven't been this low since March 2009.
What This Means for the U.S. Dollar
When we talk about what this means for the dollar, we have to talk in two different time frames.
Obviously, all this debt we've taken on through selling T-bills will eventually need to be paid. That will take a lot of dollars... Nearly $9 trillion. And the government has two choices on how to pay down the debt.
First, they can use taxpayer dollars. But we're already running a budget deficit, so there's no wiggle room to pay our obligations with these funds.
Or, they can sell more bonds, creating a never-ending cycle of obligation... which will work only as long as people (and countries) are willing to buy.
But there's a third "option" that has been ongoing since the onset of the financial crisis ... one they don't like to publicize: printing more dollars.
The Federal Reserve has been injecting newly minted cash into the system in an effort to stabilize the economy, and there hasn't been much to show for it. In a way, this is a blessing in disguise.
Had the government's stimulus plan worked, we'd be seeing skyrocketing inflation.
As it stands, we're straddling such terms as stagflation, disflation and deflation.
Near-term, the dollar is going to give and gain ground as mixed economic data continues to confuse the markets. Long-term, the U,S, dollar is in for a major crushing, particularly if the banks get their way with government backing and guarantees.
A Game of Offense and Defense
That leaves you with playing both sides of the game. On Wednesday, Jared hit the nail on the head, drawing your attention to precious metals. These types of investments are an important part of a diversified portfolio.
And diversified portfolios are important for protecting your wealth.
Investing in precious metals is getting easier and easier, and the types of assets are varied and provide good exposure to a number of ways to hold gold and silver so you can pick and choose what option is best for your diversified portfolio.
But that's not the only way to play the movements of the U.S. dollar.
Every move in the greenback's value affects every other currency in the world, and that's a great opportunity for an investor. Currency investing is a very lucrative market, with more than $3 trillion worth traded every day.
The currency market has been a hot spot for investors over the past couple of years, and this has put currencies on the radar of individual investors, too. Investors aren't settling for a defensive strategy of buying gold and silver as a hedge against their cash and other investments, though that's what every investor should be doing – at a minimum.
More and more people are opting to go on the offensive and hunt down profits in the currency market.
That's why new currency ETFs have been popping up everywhere, giving you unprecedented access to the euro, the yen, the British pound sterling, and a number of other international currencies.
You can even play the U.S. dollar with bullish and bearish ETFs available on the market today.
I've been reading Michael Sankowski's Currency Profits Trader updates to get the latest on-point information in the currency markets, and suggest you take a look at this service. Michael covers the world's major currencies, including the Australian dollar, the Swiss franc and the Japanese yen – to name a few – and with a growing currency market, and growing access for individual investors, it helps to have an expert opinion and analysis you can trust.
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