For months now, the financial system has repeatedly come back from the brink of collapse. And while public figures like Federal Reserve Chairman Ben Bernanke and Treasury secretaries from two administrations have dominated the headlines, the bureaucrats who've lived on takeout and caffeine while working fervently to preserve our system have helped create the plans that have kept things going. And now, you may stand to profit from their work.
Trust the Fed
When we look back on the financial crisis and the actions taken by policymakers to mitigate the damage, as CNBC commentator Steve Liesman pointed out at the ninth annual RISE forum in Dayton, Ohio, many will recall the images of leery-eyed bureaucrats approving bailout plans at 2 in the morning. Under such circumstances, mistakes are bound to occur, but these men and women have the best intentions of the public in mind.
They're smart, too. And if you believe like I do that they will effectively manage fiscal and monetary policy, then there's money to be made.
Timing the pivot
Now granted, confidence in the Fed right now isn't at an all-time high. Those at the Fed have gotten it wrong before, so why should people have faith in them? Many argue that Alan Greenspan committed a major folly by procrastinating rate hikes to defend the greenback, and others contend that bailout funds have been so mismanaged that you'd be foolhardy to trust the Fed in the future.
Moreover, investors are gearing up for collapse. Despite the commodities bust late last year, inflation-hedging exchange-traded funds for precious metals, like the SPDR Gold Trust (NYSE: GLD), the iShares COMEX Gold Trust (NYSE: IAU), and the iShares Silver Trust (NYSE: SLV), have drawn steady or increasing investor interest.
But even at the Fed, smart people rarely repeat the same mistake twice, and although some investors are hunkering down for severe inflation, I don't think it's going to be that bad. If the Fed successfully manages its special lending facilities and ramps them down as the economy improves, then it can remove inflationary pressure gradually over time.
Meanwhile, even if the Fed's timing isn't perfect, inflation could rise without getting out of control. Some inflation could help debt-laden consumers by decreasing the real value of their debt burdens. Once money flows freely again through the capital markets, the liquidity injections that could cause inflation could be reversed, keeping the balance in price pressures evenly split between inflation and deflation.
How to cash in
If the Fed is successful in its attack on inflation, then those gold and silver ETFs would immediately look overvalued, as would miners like Newmont Mining (NYSE: NEM). On the other hand, bets on cyclical stocks like Caterpillar (NYSE: CAT), U.S. Steel (NYSE: X), and Alcoa (NYSE: AA) could become winners.
Of course, a lot hinges on the Fed's actions. Given what's at stake, though, I'm betting that it won't choke.
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