Over the past few weeks, the stock market has gyrated with 100 point moves – both up and down – primarily driven by concerns over the Federal Reserve tapering its purchase of securities. Mortgage rates have jumped more than .5% in the past couple of weeks to over 4% on a 30-year mortgage. Treasury bonds have fallen in value as individuals and foreigners sell more Treasuries than what the government is buying. In April, foreigners sold over $70 billion in US Treasuries. The past few weeks may be a preview of things to come when the Federal Reserve actually does start to taper its purchases. Keep in mind, the Federal Reserve will still be easing with 0% interest rates even with the tapering.

Many investors are placing their hopes on the Federal Reserve to get things right. The problem is the Federal Reserve tends to be wrong as much as it is right. It missed both the tech bubble in the 90’s as well as the real estate bubble in 2006-2007. In 2009, the Federal Reserve told us that 0% interest rates and QE (1) would propel us on a sustained growth pattern. Below is what it forecasted GDP growth to be in 2009 alongside what actually occurred. Note that this forecast did not include QE2 or QE3. Why? Because the Federal Reserve thought it would not need those in 2009. As you can see, the Federal Reserve was wrong in its projections:

As the market waits with bated breath to see what the Federal Reserve says tomorrow after the FOMC meeting, investors may be focusing their energy in the wrong area. We believe that the Federal Reserve is distorting asset values with their policies and will be wrong again by keeping the “liquidity” party going longer than it should. This eventually will lead to higher inflation, a key factor we are concerned about. This is why it is appropriate, in our opinion, to have a weighting in your portfolio tied to hard assets at this time.

Sincerely,

Your THOR Team

Worth keeping an eye on:
http://www.newyorker.com/online/blogs/comment/2012/03/turkeys-jailed-journalists.html