Playing The FOMC? It's All About Risk Management

How to play the FOMC? Does it matter beyond “manage risk?” asked the robotic blogger.*

The Fed has been using its jawbones as well as talking out of every other orifice over the last month or two with regard to ‘taper or not to taper’. The stock market is at the moment on a tout that sees them saying ‘never mind about the taper stuff for now. We were just floating a trial balloon to prick the speculative atmosphere’.

The US dollar has been hammered but is now at a support point. Inflationists are wondering why on earth are commodities so weak and precious metals so bearish while Uncle Buck is on the mat like this? That is a good question.

I am sure many people are thinking that T-bond yields are indicating economic growth or at least that inflation is coming, but I am not so sure. There is this man of infinite patience and consistency of message – a super robot* really – who sees higher bond yields as fitting in nicely with a deflationary scenario. That would be Robert Prechter. His view is that yields would not be rising because of the usual ‘inflationary expectations’ or economic growth, but because of impending debt default.

There is that word again; D.E.B.T. and with stocks again soaring amid robust use of margin (yeh, yeh, I have heard all about that money on the sidelines, but much of the money that is playing the market is borrowed). I would have to think that a large proportion of the money on the sidelines is a) being used by individuals and businesses to repair balance sheets and deleverage (deflationary) and b) sitting on the books of banks and other privileged corporations.

This last condition could change if – and it is still a big if – the banks are compelled to put that money to work with the prospect of higher interest rate return (our ‘taper to carry’ thesis).

But in an era when governments competitively try to stave off debt reckoning by compromising currency (some might say the oldest monetary trick in the book), a currency with as much upside potential as the USD – especially after the hard decline of the last month – is not going to prove convenient to the inflationary growth crowd.

This brings me to another thought. You know how Ben Bernanke is public enemy #1 in the gold “community”? Well, was he not once thought of as Helicopter Ben, subject to mockery and ridicule but also depended upon as the great inflator who would personally enrich the community’s members? What if – the brilliant Op/Twist aside – he is the same old Ben but the inflation is just not working? What if he is just as nonplussed as the average gold bug or commodity bull?

I am just asking questions here. The stock market is the last man standing and could be on its final tout as well. Maybe the precious metals blow-off in 2011 was the kickoff to a new era where they lead commodities, T-bonds and finally stocks down into a phase where there is only one king and his name is Cash.

The USD is still on a bull signal with the cross of the weekly EMA 10 over the EMA 35. If this is negated then we might watch the monthly for failure. But the USD is still bullish until then. We might want to watch the Aussie dollar with respect to any ‘inflation trade’ potential. Crude oil, as already noted, looks bullish for a trade. The majority of the commodity complex is however, in a sad state.

In a deflationary scenario on the other hand, King Dollar – the reserve currency and marker of claims to a world full of assets – would rule. The ruthlessly abused Yen and the Barbarous Relic of monetary value would eventually play roles in a rush to liquidity as well. But I think it would be prime time for Uncle Buck first and foremost for a while.

* Why not stick to what has worked in robotic fashion during a phase when markets appear so screwed up that luminary market players are publicly considering cashing in and leaving the game due to the messed up signals that meddlesome policy, systematic manipulation and investment by machines have injected. In my case what has worked is risk management and risk management only over the last 6 months and really, two years. I’ll stick with it until I get solid data.