A saying as old as Wall Street itself cautions investors: “don’t fight the Fed!” Massive central bank intervention has always worked in the past – and will inevitably work this time too – it’s just a matter of time.
Once upon a time, the Federal Reserve’s mandate was two-fold: maintain price stability (fight inflation) and full employment (promote economic growth). Not anymore. Now, bailouts like Bear Stearns (or Long Term Capital in the Greenspan era) are the norm.
Globetrotting investor Jim Rogers recently pointed out in a Bloomberg interview that the Fed’s mandate is: “to keep a sound currency, not to prop up Wall Street." The Fed has already “trotted out hundreds of billions of dollars to prop-up their friends on Wall Street.”
The Fed’s “propping-up” seems to be working, at least for now. Wall Street’s “primary dealers borrowed more than $13.4 billion a day from the Federal Reserve in the latest week”, according to Reuters.
Firms including Bear Stearns, Goldman Sachs, Morgan Stanley and Lehman Brothers tapped into the Fed’s easy money – and why not stock up on cheap cash – at interest rates as low as 2.5%. Total “discount window borrowing came to $19.05 billion a day in the latest week,” according to data from the Fed.
Another Inevitable Consequence of the Fed’s Easy-Money: Inflation
The key is for this easy-money to help lower the rates that matter most. As I said in a post yesterday: “Keep a sharp eye on 30-year mortgage rates.
Once they decline significantly, and for a sustained period, the financial sector will finally get lasting relief – and certain financial firms could make a killing.”
Homeowners too will get a chance to refinance their way out of adjustable rate loans before rate resets kick in. Stay tuned.
Of course another inevitable consequence of the Fed’s easy-money policy is structural inflation.
Consumer prices are climbing over 4% year over year. Producer prices (which will get passed through to the rest of us sooner or later) jumped nearly 7% over the past 12 months, with energy (up 19%) and food (up 6%) leading the way.
The chart above shows that long-term inflation expectations are on the rise – getting baked in the cake so to speak – but this process is just getting underway.
The inevitable consequence of this will be higher commodity prices – eventually.
Pairing Up Your Trading for Gains No Matter Which Way the Market Breaks
In recent days, commodities from gold to grains and everything in between have been hit hard by profit-taking. Gold suffered its biggest weekly loss since 1990, at one point falling over $100 per once this week. That’s not surprising since commodities are among the few “profitable” assets left to sell as institutional investors get hit with margin calls.
Look at a chart of nearly any commodity and you’ll see a parabolic run from lower-left to upper-right… so a correction in this asset class is way overdue in my view. Ultimately, this will provide you with a better buy-point for when commodities rise again.
In my Market Shock Trader service right now I’m focusing on ways to play the decline in commodity stocks with well-timed put options. This gives my readers a handy way to hedge their investments – and earn profits in the midst of a sharp sell-off.
At the same time, I’m singling out a few carefully selected call option bets to profit from the rebound rally we’re seeing in other stocks and sectors.
Some investors might call this a “pairs trading” strategy – going long (with call options) and short (with puts) at the same time – sometimes even in the same sector! I look at this as a solid all-weather trading strategy to profit from volatile financial markets.
Today, I’ll be sending my Market Shock Trader subscribers all the details on my next option recommendation. If you would like see the specifics of my next pick to profit in volatile markets, take Market Shock Trader for a risk-free test drive now.
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