Then too what is always coming around the bend is change and at some point in time, in the United States and most countries around the world gold as a standard of economic value or money was changed. Since we no longer use the gold standard as a means to value our dollar the questions beckons what is relied upon? Answer: Fiat Money. Which is money backed by government demand for it as legal tender in payment of legal liabilities such as taxes and social security benefits. Since the government has an unending income stream in taxes and can create as much money as it deems fit, fiat money is said to be backed by the full faith of the government.
It is argued then that the excess of fiat money creates inflation. Which in a market economy the actors thereof will attempt to predict the government officials action in order to advance the value of their assets. During times of inflation then those said actors will seek to tranfer their fiat money to other forms of money that will not be discounted as fiat during inflationary periods. This in and of itself creates an opportunity for the financially vigilant and the nimble who can see the change in course and manuver to take advantage before it happens.
THE BUSINESS CYCLE
The business cycle is affected by the creation of liquidity and the reduction of liability which when applied starts a chain reaction of increasing money supply which leads to both consumers and business' borrowing more money to acquire and or facilitate growth. The borrowing leads to profits for corporations and the subsequently higher taxes for uncle sam. Business' expand and hire more employee's who now are required to pay taxes on the salaries earned and consumers spend more this creates economic activity which boost Gross Domestic Product or GDP. Which measures economic activity. It is the federal government that initiates this cycle both to wall street and the local man on the street but they do it for primarily self serving reasons. As described above a lot of the benefits is returned to the government in taxes and the confidence of the voting public.
How then might one profit from any of this? For one in the preparation for the federal governments action or the lowering of interest rates many stock market participants will remove from the market hoards of its capital this causes a devaluation of stock prices as measured by the S&P 500. Thereby creating a buying opportunity for those prepared to do so. One can use the high S&P index number prior to the action then measure for a 5% to 20% retracement which when this occurs before the federal goverment lowers interest rates,savy investors with start dollar cost averaging back into the market. One can remove from the market some portion of ones investment only to replace it on the the day the fed start the very first cut in interest rates since the last time it had embarked on increasing said interest rates. This same occurrence took place on Sept 18 2007 when the S&P Gained over 3.3% in just two days this confirms a new bull run. Which with more stoking and proding from the fed, in the continued lowering of interest rates. This starts a new cycle where we can all be berry merry and have a great Christmas.
It might be meaningful to be aware that during the trading year there are about 3 to 7 days that one does not want to be out of the market Semptember 18, or slightly before say one or two weeks before would have been ideal. They say you can't predict the market and perhaps there is some level of truth to that. however, it was sure noticeable that the FOMC or Federal Open Market Committee had scheduled their meeting months in advance where anyone could have been informed.
WHAT TO LOOK FOR AND WHY THE FOMC LOWERED INTEREST RATES
One more piece of information to consider. What made the FOMC lower interest rates on this date? Answer: the need to fulfill a dual mandate that is clear to all who know it and that is to maintain full employment and price stability the very same prices that affect you and I each and every day. When some of the goods, such as real estate, consumed by all of us reaches high prices where others are unwilling to buy them there tends to be a retracement of prices. This has occured in the Housing Markets which comprises almost 24% of economic activity if one include financials and Insurance. Since the first quarter of this year GDP grew at a paltry .06% the gatekeepers at the FOMC needed to reinsure us that they are doing their jobs. Since a potential 24% of GDP growth was known to be in jeopardy it would be unthinkable not to act. Additionally the Economy is like 200 Titanics they don't turn on a dime, it takes time to stop whatever direction they are going in and turn them around. So the FOMC had to act now so that there would be adequate time to see a turning around of the economy. The economy is, as stated by the former FOMC's chairman, likely to head into ression by a 33% likely hood. Due to the slow nature of turning the Titanic I believe this number is 45% therefore in the next six to nine months will lend themselves to a deffogging of the seas she sails. The reported GDP number will be clear to see.
HOW DO WE MAKE MONEY
We retain our vigilance and be mindful of economic forces and activities learn what types of assets rise when and why seek to be owners of the right assets at the right time otherwise you will continue to suffer the setback of corrections. Such as those being experience by non-vigilant real estate investors and subprime booboo heads who knew or should have known what the money was going into. We see that the fed has acted in changing its interest rate policy by being more accomodative and this leads investors to speculate that the future will be brighter. You should follow their lead. A wise man once said, we do not need to know why they do what they do but we certainly can too. Even though we, duh! do.
