And I expect it to generate a serious profit, perhaps as much as 50%, in the next 2 years. But it could go much higher. In just the six months since I first told followers of my Trend Traderportfolio about this play, it has returned about 12%. And the fun hasn't even started.
This investment has two huge forces behind it: interest rates and inflation.
The interest rate part of the equation will play out in two ways.
Short term, it will hand us gains over the next 12-18 months. This is where we have made 12% already. Let's call this Part A.
Long term, it will hand us gains over the next few years. This is where the big profits will be made. Let's call this Part B.
Inflation is the other major part of the equation. Let's call this Part C. It is already underway, but the government just doesn't want to admit it. That's fine. We know it is here. And with all the "new dollars" that've been created by the government over the last 2+ years, it is only a matter of time before it shows up in official government statistics.
But before we dive into "how" these forces, when combined, could hand us huge profits, let's take a step back and look at "why" they happen.
Getting By With a Little Help From Their Friends
When a bank needs to borrow money (if, for example, its balance sheet is full of mortgages that it should have never written and it is on the verge of collapse), it can borrow from the Federal Reserve at what is called the Fed Funds Rate.
When the stock market peaked in October 2007, the Fed Funds Rate stood at 4.75%. Then the market began its historic slide. So the Federal Reserve started cutting the Fed Funds Rate. By December 2008, it was down to 0%-0.25%. This is called quantitative easing. And it was done with the hope that banks would borrow the cheap money and increase their lending. The idea was that it would help jumpstart the economy.
(Note: The Fed never before lowered the Fed Funds Rate to zero. The lowest it had ever been was 1% during the recession of the early 2000s. Lowering it to zero was clearly a last ditch effort.)
Finally, in March of 2009, the market started to rebound.
And as we approach the two-year anniversary of the March 2009 lows, the market is up nearly 90%.
Despite this huge turnaround, the Fed began another round of easing (now called QE2) in November of last year.
Without debating the relative merits of the two programs, the end result is that at least 2 trillion "new" dollars are now flowing through the economy. And this makes the issue of inflation nearly unavoidable. How bad it will get, we don't know. But it is coming.
Remember, inflation is Part C of our equation.
And when inflation can no longer be ignored by the government, the Fed will have no choice but to respond by raising interest rates.