‘Close to the vest’ (AKA not leaning too far one way or another, AKA cash) remains the play until the FOMC meeting and its aftermath are cleared. This is because of the pervasive obsession with the FOMC, its Dot Plot and the foregone conclusion that the Fed Funds rate will be raised either in June or September according to the most prevalent hype.
This putting aside the fact that the last two rate hike cycles went hand in hand with rising stock markets for an extended period before the markets finally liquidated. So the media are stirring the pot and amping up the volume about something that has not proven to be historically relevant, in the near-term at least.
Speaking of historically relevant, I want to pass on something that a subscriber sent to me (thank you Joe!). It is from a very nice little investment outfit called Bridgewater, whose ‘all weather’ strategy is explained here. Clicking the following graphic will bring up a very interesting historical precedent for the current situation. I think it is worth your time to review it.
Despite the chronic strength in the US dollar, which has played a role in certain initial signals of economic leveling, the Fed has painted itself into a corner with respect to interest rates. After all, one of their primary objectives (IMO) is to maintain the illusion of sound stewardship, keeping market participants right there, enthralled and entranced by the important matters that they ponder.
They must realize that policy has been a bubble in the US for years now and that a policy bubble has spread around the world, with Europe, China, Japan and many others easing in one form or another. This morning I noted some research about the formerly strong S. Korean Won buckling under the pressure of the Yen as Korea feels the pressure in this case. From FullerTreacy:
“The Yen’s devaluation has put a great deal of pressure on the national champions of countries like South Korea, whose export oriented business models compete with Japan’s. With Japan still engaged in QE, other countries have little choice but to ease their own monetary policy in order to maintain their competitiveness.”
And on and on it goes. The world is competitively devaluing and the US is tightening, not by active policy but by the movement in its reserve currency. The US dollar is tightening for them. But this tightening follows 6 years of off the charts monetary experimentation and I am not going to pretend to be the guy who can logically map out exactly how this will play out.
What I am going to do is advise that we take it one step at a time, keep an open and revisable plan and be ready for the inevitable changes to come. Right now the plan is to get past this FOMC meeting and Yellen Jawbone and see where the dust settles. Going forward I expect we are going to get increasingly actionable signals as the USD heads for what ever high (interim or cyclical) lay ahead and the Euro, the opposite.
The stock market bounce has not reversed its potential to correct, yet the Biotech index is screaming and the Banks and Small Caps are firm. While one may not want to invest in a market like this, it is an argument against active bearishness just yet. Again, let’s see what the post-FOMC climate looks like.
Precious Metals have been bearish into FOMC, which is actually something I would rather see. Had they bounced hard into FOMC they’d probably sell off after. If the Fed were to reverse course and surprise the markets with negative talk about the strong USD, this sector would probably go Sky Lab.
But again, how do you out guess some of the most cynically brilliant people on the planet? I don’t… predominantly cash.
When hard evidence of cycle changes emerges there will be plenty of opportunity to get into rhythm with those changes. Meanwhile, it’s all noise and guesswork.
