Money printing: good for stocks - bad for bonds – Ciovacco Capital

  Money printing: good for stocks - bad for bonds – Ciovacco Capital


As Ben Bernanke clearly stated during this week’s press conference, the Fed is trying to inflate the value of 401(k)s and residential real estate, which is another way of saying the Fed is trying to create positive inflation. Inflation is bad for low-yielding investments like bonds and money markets. In the intermediate-term, inflation should drive precious metals (GLD) and global stocks (VEU) higher. If you missed this week’s Fed press conference, this is straight from Mr. Bernanke’s mouth:

“If people feel that their financial situation is better because their 401(k) looks better or for whatever reason — their house is worth more — they’re more willing to go out and spend. That’s going to provide the demand that firms need in order to be willing to hire and to invest.”

If you are sitting in cash or have a heavy allocation to bonds, the chart below is telling you it may be time to make some changes. The Fed has basically started an unbounded/unlimited round of money printing, which we highlighted on August 27. In technical analysis, charts tend to fill white space. The long-term chart of the Treasury Bond ETF (TLT) has quite a bit of potentially bearish white space below, which is a good sign for stocks (SPY), precious metals (GDX), and commodities (JJC). Note the 22% drop in TLT that occurred during the Fed’s first quantitative easing program (see 2009 below). The bearish divergence between the slope of price (see A below) and the indicator (see B) foreshadowed the recent drop in TLT and gains in risk assets. We pointed out the divergence weeks, if not months ago.