In today’s Money Morning…China did the Fed a favour before FOMC…the contrarian Business as Usual (BAU) play and the ‘debt is money’ hedge…that doesn’t mean your arms are tied…and more…
Surprise, surprise. Well, the lurch from global share market implosion to modest bullish excitement is in.
Overnight the NASDAQ finished .7% higher, with Facebook, Alphabet, and Apple tacking on .9%, .9%, and .7% respectively.
Tesla managed to tack on 1.3% as well.
Meanwhile, all eyes are on the latest meeting of the Federal Open Market Committee (FOMC).
This is where all the head honchos from the US central bank um and ah over money printing.
The FOMC is like a lovestruck juvenile pulling petals from a daisy, I taper not, I taper?
And the market is up — a classic case of novices opening the market and pros closing it.
It’s also a case of media ‘bear-hype’ fooling you with words when the charts of the major indices tell a different story.
That’s not to say that the Evergrande mess is firmly in the rear-view mirror now. It’s more that the narrative is back to square one — with the Fed now being told by the market to pay up again.
Or maybe it will pay up slightly less this time?
Here’s what to expect from that largely meaningless FOMC.
China did the Fed a favour before FOMC
After a monster rally, there’s a good chance the Fed wanted to put the brakes on the market for a bit.
Luckily the Evergrande problem out of China snuck in a few gnarly red bars, meaning they can be a bit more dovish with their remarks.
Here’s how one commentator in the Australian Financial Review put it:
‘“Think about the following: You have an $US8.5 trillion portfolio at the Fed, it’s buying at $US120 billion extra a month and it’s reinvesting all of the maturing assets,” Levy, chief economist for the US and Asia at Berenberg Capital Markets, told Bloomberg. “What’s the difference to the economy or financial markets if it slows down and buys $US105 billion new a month?”
‘He added, “It has no impact on the economy.”
‘Levy pointed out that Fed chairman Jerome Powell has said that tapering won’t affect when the central bank would consider raising interest rates.
‘“You could have an announcement” of Fed tapering, “and bond yields will go up a little bit”, Levy noted. “But they are already ridiculously low, so it really shouldn’t have much of an impact at all.’
I’m with you, Mr Levy.
A modest reduction in the rate of bond purchases should have limited impact.
It’s analogous to the Fed blowing a huge hole in the Hoover dam (holding back a flood of money) then plugging up the gaping hole just a little bit.
It doesn’t matter. Every corner of the market is already drenched in money.
And there’s more fiscal (government) stimulus to come.
So what’s the play for investors in this environment?
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The contrarian Business as Usual (BAU) play and the ‘debt is money’ hedge
A few days where it’s a ‘sea of red’ on the small-cap watchlist is not out of the ordinary.
The number of down days doesn’t matter too much, but if those down days are sharp and persistent, then you have a real risk-off move.
So with this in mind, it may now be a case of looking to back the contrarian Business as Usual (BAU) companies.
For example, there’s a myriad of exciting small-caps out there which you could trade using Ryan Dinse’s proprietary momentum indicator.
Obvious editor’s note: Small-caps are notoriously risky. You may lose part or all of your capital.
You could also look to hedge against the ‘debt is money, and money is debt’ system that we’re working within.
Evergrande is a smokescreen for the first cracks appearing in a system that was built on centralised lending books.
Check out these old codgers getting their clip of a loan in the 14th century:
The system worked fine for seven centuries, until around 2008.
Post-GFC, a few wise heads figured out that the system was rigged.
Yes, I’m saying you need to think about holding at least some crypto.
And it’s fine to be a bit confused by this emerging and notoriously volatile part of the market.
But that doesn’t mean your arms are tied.
For guidance, definitely check out Ryan Dinse and Greg Canavan’s New Money Investor service.
Just a little bit tucked away in the right places could put you in a much better spot should the monetary system start to unravel.
For Money Morning
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