George Maniere: Fed Call Wakes Up Global Markets

InvestingAdvicebyGeorge – Yesterday the Fed minutes were released and to cut to the end they told everyone what they already knew and why the markets have sold off 14% in the last two weeks. The U.S. economy is slowing and it’s not all transitory from bad weather and Japan’s tragic tsunami and earthquake. While people will debate the verbiage what was made abundantly clear was that the Fed is going to keep interest rates low for a very long time. The statement said rates would remain low until mid 2013. That the Fed would commit to such a long time frame is a very unusual event.

The reaction to the announcement, at first, was odd because it seemed that the market didn’t get it. I can only conclude that this was profit taking or short covering but it looked like investors didn’t get it. The Fed had just announced that they were going to keep interest rates a zero for the next two years. That’s two years of free money! It would not be very politically correct to say quantitative easing out loud so the Feds had taken to using code. Coded or not the message was clear. The Feds will do whatever is necessary to boost asset prices, even if it means some inflation. So as I wrote, after the announcement stocks pared back all of the day’s gains and was in the red below yesterdays low. Then at 2:45, it was like a light bulb was turned on. The market did a complete about face. It sprinted to the close as if it had suddenly dawned on investors that the Feds were saying free money for the next two years.

The Dow soared to the bell up 430 points, or 4 percent to close at 11,240. The NASDAQ rose 125 points to close at 2482, or 5.3%. The S&P 500 rose 53 points to close at 1172, or 4.7%.

So in my opinion there were four important points from Tuesday’s statement by the FOMC:
1. The Fed Funds rate will be “exceptionally low” at least through mid-2013.
2. Three FOMC members voted against this action.
3. The Fed disclosed a range of policy tools to promote a stronger economic recovery were discussed.
4. Inflation is seen at or below its target.

With an unprecedented number of dissenters voting against Bernanke’s move, it could suggest the mid-2013 language is just the start of what the Chairman has up his sleeve and the inflation hawks want no part of it. The statement also suggests Dr. Bernanke’s Jackson Hole speech could prove to be another major event, like it was in 2010. Bernanke’s speech is scheduled for August 26th and it could bring more details on what forms of stealth QE he has in mind to support growth.

Does this mean the market is out of the woods? No – far from it. While the Fed can boost asset prices and support the economy it can only do this at the expense of devaluing our currency. As I have written many times a key for this administration is the continued devaluation of the dollar. They see it as the only possible way to begin to pay off the debt. As Gerald Loeb taught us it is not how many dollars you have but rather what the value of the dollar you have that is important.

Well it seems that, for today, Dr. Bernanke has pulled another rabbit out of his hat. The Asian markets soared on the news and the European markets are all trading higher on the news. Gold is roaring to new highs and it seems there is no stopping it.

If there is one thing I have learned in the market it is that the messages you are expecting are not always delivered gift wrapped with bows. Sometimes they are so subtle that if you are not paying attention you don’t even notice them. What I saw in the 600 point rally from 2:45 to the bell was gold sold off almost $100.00. In the after markets it bounced back but I have been writing that until gold corrects I would be standing aside. Well the correction we saw for an hour yesterday may not have been what I was expecting but it might have been it. The message from the Fed was clear. By whatever guise possible, there will be more quantitative easing. There will be further devaluation of the currency. Today will tell the story. Was yesterday the real thing or a fake out? We will soon know. As I write both Gold and Silver are roaring in the premarket.

So in conclusion, how do we play this market? First let me begin by saying that based on what I heard from the Fed yesterday the bold prediction of Chase yesterday of gold at $2,500.00 an ounce has almost been assured. If currencies are continually debased there is no question about it. I would suggest that you hold your GLD or SGOL or PHYS or whatever ETF you are using to play the paper trade of gold. Look to add to it because while I expect it to pullback (as it did for an hour yesterday) the upside potential seems to be headed for $2500.00. For the moment stand aside of any silver ETF until we get further clarity. As I have written I have a nagging feeling that silver seems to be determined to retest $32.50 so until there is evidence to dispute this just wait. My long term thesis of silver at $55.00 by year’s end remains intact. If you have been making a shopping list of some equities you want to own start slowly wading in. Most of all keep your eyes glued to the VIX and when it spikes up look to wade in as these are buying opportunities.


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