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The Fed Eats the
Marshmallow Every Time
By Evaldo Albuquerque, Editor of Pure Income
Dear Sovereign Investor Subscriber,
In the 1970s, physiologists at Stanford University conducted an experiment that became a classic. They wanted to determine at what age children develop the ability to delay gratification.
So they gave a marshmallow to each child. At the same time, they told them they would get another marshmallow if they resisted eating the first one for a certain period.
In follow up studies in the 1990s, the scientists observed that children that resisted the temptation of eating the marshmallow had more success in life. They concluded the ability to delay gratification results in more long-term success.
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I tell you this story because our central bankers would definitely fail the marshmallow experiment. Let me explain.
The Best Economics Book I Ever Read You're probably not looking for an economics book to read. After all, most of them are pretty boring.
But Economics in One Lesson, by Henry Hazlitt, is an exception. And it's probably the only economics book you will ever need to read.
Read that book and I guarantee you will know more about economics than any of our central bankers who hold PhDs from MIT and Harvard. You will be able to understand how economies really work, instead of just learning abstract concepts.
I won't give you too much detail, but the main idea of the book is that the government always focuses on the short-term results of its policies. It completely ignores the long-term effects, which usually leads to disaster.
The Fed is no exception. Just like the kids who can't wait for a bigger gratification, the Fed can't implement policies that are good in the long-term. It always wants instant gratification.
Just like the kids who failed the experiment ended up with less success in life, the Fed, with its short-term policies, is also likely to see bad results in the long-term.
The Fed has No Clue The Fed may be propping up the markets in the short-term. But this is likely to lead to much bigger problems in the future.
The truth is today's policymakers don't really care. When the next crisis comes, few of them will be around to answer for it. That's why they only focus on short-term results, even if it leads to disaster in the long-term.
Look at what Greenspan did, for example. Everyone considered him a genius for engineering a boom in the 2000s by keeping interest rates close to zero for a long time. But his policies ended up in a catastrophic disaster.
Bernanke and the current members of the Fed are doing the same… but on a much larger scale. It's highly unlikely their massive interventions won't have negative consequences, especially when they have no idea what they're doing.
In a recent speech, Dallas Fed President Richard Fisher admitted the Fed is running a monetary experiment that could easily have unintended consequences. Here's what he said: "We are sailing deeper into uncharted waters. Nobody on our staffs at the Board of Governors and the 12 [Federal Reserve] Banks – in fact, no central bank anywhere on the planet – has the experience of successfully navigating a return home from the place in which we now find ourselves. It's not clear to me despite our theoretical ability to understand the tools very well, in practice, how we are going to get out of this." The crisis in 2008 was caused by easy money and too much debt. The Fed is doing everything it can to perpetuate the same bad policies that caused the last crisis. This Popular Strategy Could Ruin Your Portfolio This will not end well. The policies are already encouraging more debt and financial speculation, instead of investments in productive assets.
So why should you care? The problem is the market has a cruel way of correcting those misallocations of capital. It usually does it through a nasty crash.
Investors who follow the popular "buy and hold" strategy will be crushed by the next Fed-induced crash... just like they were in 2000 and 2008. I can't tell you when the next crash will happen… nobody can. That's why it's important to adjust your portfolio as the market conditions change.
I've spent the last few months developing a flexible strategy that avoids catastrophic losses, while riding bull markets. It's a revolutionary way to save for retirement that has averaged a double-digit annual return over the past decade.
You will be hearing more about this strategy in the coming weeks. Stay tuned.
Regards,
Evaldo Albuquerque
Editor, Pure Income
P.S. My publisher just received an eye-opening alert about a landmark event that's set to soon rock the economy. Consequences of this event could be so dramatic – most middle-class Americans will not be able to imagine them, let alone believe them. Yet you have the potential to make a vast fortune in the months ahead by knowing what's coming. Before you invest another dollar in the markets, I recommend you watch this video. If you haven't seen it yet, I urge you to click here now.
Chart of the Day
Coffee Prices to Double over the Next 1-2 Years For all of you coffee lovers out there… you might want to pay attention to this chart. This is an ETF that tracks coffee's price. Its symbol is JO.
Coffee prices have been declining since early 2011, but I believe coffee's price will double from today's levels over the course of the next one to two years. Why? Let's take a look at the weekly, three-year chart of JO below.
Technical Divergences Indicate the Nearing
of the End of the Downtrend 
See larger image JO has now declined back to its lows of 2008 and early 2009. It will likely hold somewhere in that support zone before beginning its ascent over the next year or more.
Additionally, the weekly chart's Relative Strength Index (RSI) is diverging higher and so is the moving average convergence/divergence (MACD) seen on the lower chart above. When these indicators move higher while the asset at hand is moving lower overall, that's a bullish sign. It means that the end of the downtrend is likely very near, especially since these divergences are happening on a long-term time frame like this.
But in addtion to all of this, when a downtrend has been in force for a year or longer, I begin to look for signs of current investors' frustrations.
I know when investors get frustrated enough they'll throw in the towel en masse. I know this because typically there's a red volume spike on the weekly chart and that volume is typically at least two to three times its average weekly volume.
Well, we've seen one of those instances recently. I've noted it in the black box above. It's during those times, or shortly thereafter, that the bottom typically forms and a new uptrend begins.
Therefore, coffee's descent is likely 90%-100% over with lots more upside potential than downside risk from here.
You better get ready to pay more for your coffee a year from now. Coffee companies will typically take the initial hit on the earlier rounds of the rise in price. But eventually, they end up passing the rest of the rising costs onto you and me, the consumer.
A great way to hedge against the rising coffee costs is to buy JO when the bottom is in place.
Have a nice day!
Sean Hyman
Editor, Commodity Trend Alert | | TODAY'S EDITOR | Evaldo Albuquerque
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