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November 4.0; Sell stocks, buy silver - Money Matters for 11/1/05 Don Bravo | 11/1/05
As the Federal Reserve Chairman, Alan Greenspan has served 17 years, many of them good years for the U. S. economy. Set to step down in January, 2006, Greenspan continued today with the 12th consecutive "measured" interest rate hike, boosting the Fed funds rate to 4.0, the highest level in four and a half years.
Not content to leave quietly, Greenspan, aided and abetted by his fellow Fed governors, has been insistent that the economy must be slowed down and inflation kept in check by raising borrowing rates. Unfortunately for "the Maestro," as he has been called, the rate increases haven't slowed down inflation (especially when it comes to energy, taxes and health care) at all, though they've certainly made it more difficult and expensive for businesses and individuals to borrow capital.
There's scant evidence that the economy is, has been or is in danger of overheating. Even on the heels of the first iteration of 3rd quarter GDP, certain to be revised, that the economy grew at 3.8%, the figures show that most of the growth came from the government sector, and most of that in the form of military spending. That kind of spending is not indicative of an economy displaying healthy growth. It is rather a sign of an economy woefully distorted and on the wrong track.
On the first day of November, 2005, the market reaction to the rate hike was negative, albeit barely so. Greenspan's legacy will remain intact - for about six months after he steps down. Whatever happens in the US economy will be neither his fault nor his doing. He will be forgotten like last week's cold even though his madness for raising interest rates will be a primary cause of what occurs.
The impact of his interest rates will not be fully felt until at least the second quarter of next year. In the meantime, he may in fact get the economy to slow down, though one has to do quite a bit of head scratching to figure out why that result is considered to be a good idea.
If we can draw any conclusions from Fed rate moves it is that they have raised rates only in order to lower them at some future date. When they do get to the appointed position of slowing down the economy enough, the Fed will have to do what it always has done to get it up and growing again... raise rates. It seems like a lot of effort for nothing good in particular.
Silver dropped below our target price of $7.50 today, so if you like long term solid investments, buy the precious metal with both hands. As interest rates continue to climb, keep a close eye on silver and gold, as they both have been on a tear for two years and are about to enter the next explosive phase of their bull run.
We're still keeping a close eye on the new highs-new lows, which flipped again on the NYSE and stayed in the green on the Nasdaq. Also, the Google news search for the word recession, bounced off last week's low reading of about 4,200, to about 4,900 today. By all indications, November is shaping up to be a very volatile month for investments, especially stocks and commodities.
Dow Jones: -33.30; 10,406.77 close
NYSE Advancers: 1550
Nasdaq Advancers: 1266
NYSE New Highs: 93
Nasdaq New Highs: 97
Gold: -6.30; 460.60 close
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