Lighten your positions before the Fed’s announcement
The market has undergone some wild swings, says John C Burford. A sure sign the Fed's announcement is coming up.
About this time tomorrow, the waiting will be over: the Fed will have spoken. This whole charade reminds me of the Delphic Oracle in Ancient Greece: when the Oracle was asked questions, her answers were ambivalent or even ambiguous.
Can Janet our modern-day Oracle continue that noble tradition with tomorrow's utterings? Her pronouncements have been suitably vague so far. But the master of the obtuse was Fed chairman Alan Greenspan (1987 2006), with Ben Bernanke (2006 2014) a close second.
One of Greenspan's quotes is famous: "I guess I should warn you, if I turn out to be particularly clear, you've probably misunderstood what I said".
I do not expect Janet to come out with a firm plan it will be along the same lines as before "We will raise rates when the data allow".
So how are the data looking?
The US economy is too weak for the Fed to raise rates, but the market is doing it for them anyway
Not only are current conditions weak, but new orders are reportedly very weak as well, suggesting September's data will likely not improve by much, if at all. So much for the effectiveness of the Fed's quantitative easingpolicy.
And how is the Fed's avowed target inflation rate of 2% doing? Here is the chart of the consumer inflation rate:
Oops! It's going the wrong way as prices of consumer goods are getting cheaper. That wasn't supposed to happen. But it is happening, and to those of us who have long maintained that the forces of deflation will overwhelm any artificial efforts to prop them up, it is not news (although it is to many economists and pundits).
Are these the conditions of a firming economy that would prompt the Fed to start raising rates? I don't think so and this is what the Dow thought of that prospect yesterday:
The 250 point rally yesterday was the latest in a line of huge swings both up and down just since 1 September. And as of this morning, the Dow has made a net gain of less than 100 points in the month.
This extreme volatility tells me the market is wrestling with the one big issue confronting it when rates will 'officially' increase, as they must eventually. But isn't it a touch ironic that rates will have to increase in the face of a strong deflationary tendency? That contradiction is why the stockmarkets are very nervously waiting for the word from the Fed.
But as I have outlined in previous posts, market rates are increasing anyway. Here is the chart of the 30-year Treasury bond:
Yesterday, the 30-year yield surged as stocks rose. The yield on the short-term three-month T-Bills also rose.
So markets gave us mixed messages yesterday: stock markets believe a Fed rate rise tomorrow is now less likely, while the Treasuries are telling us the opposite.
How to play this uncertainty
But what the T-Bonds are trying to tell us is that inflationary pressures are about to pick up into the winter.
Recall in a previous post I had forecast a big rebound in commodities. Below is the latest chart for crude oil. The market has been making a complex wave 4 all month and is poised for an upside breakout in wave 5. Already, the market has just broken above my upper wedge line. There will be a whole host of buy-stops near the highs and if the market can get there, the move should be intense:
So maybe the Fed's target at 2% is not so outlandish after all.