On Wednesday November 3, 2010 the Fed announced the long awaited activation of the Fed printing press.  Couched as “quantitative easing” it will insert $75 billion a month * into the monetary system by buying Treasuries. 

No new hard assets or wealth will be created... just more paper monetary claims.  Treasuries are, after all, just government debt. The stated goal is to keep interest rates down by buying Treasuries in the hope that this will stimulate the economy. A more realistic view might be more akin to whistling past the graveyard of inflation.

When markets get flooded with newly printed monetary claims it results in a decoupling of the value of the claims with the values of actual assets. This explains why gold continues to soar beyond its historic highs. Gold hasn’t so much soared as the currencies in which it is priced have become debased. 

The fundamentals of inflation start, and end, with a debased currency. The paper is, indeed, just paper. Creating more paper to buy paper can only result in eventual inflation. Investors be wary.

This does not completely mean investors should ignore paper based pricing it just means investors need to look at what is actually owned. For example shares in a real estate trust or fund may be priced in dollars but the value consists of what the hard property assets within are worth. As a corollary the assets need to be understood in terms of their long term value and replacement cost.

Corporate shares should be valued upon the value of the business itself. One metric is simply would you want to own this business model and this company in 3, 5 or 10 years. A strong business structure based upon serving a resilient economic need will reward its shareholders.

Oil and gas investments have current attraction but they remain commodity plays and are, inherently, very risky. If you have an advisor who says otherwise…and you follow them on that basis…then there is a great bridge in Brooklyn looking for investors. This is not to say don’t invest;  just understand that high risk cannot be engineered out of oil and gas. There are some good opportunities in energy investment as pricing is no longer at the hyper boom levels….just don’t bet the farm.

Gold remains extraordinarily high, even more surprising as it produces no income. It is seen as a repository of value and an antidote to currency debasement. Investors seeking the protection of hard asset ownership but looking for the added protection of income are moving into ownership of high quality investment property assets and funds. This is not distressed condos or subprime decimated single family homes.  Instead it is shares in investments that acquire institutional grade property.  (Institutional refers to the type of assets that institutions such as insurance companies buy for their own portfolios)

The economic forecast continues to be for “slog” with inflationary clouds building. The strength to move forward briskly is not there but the extraordinary power of the American economy continues to provide an investment floor.

*Average maturity of the Treasuries to be purchased is reported as 6 years. Fridays 10 year Treasury closed at 2.538 %