What to Buy as the Great Unraveling Gets Underway

The Federal Reserve’s open market committee meeting is taking place today and tomorrow.  Central to their discussion are the two words “considerable time.”  Have you ever heard something so nonsensical?  What gives?

It all started several months ago when Janet Yellen said these words mean six months.  So, now, if the Fed drops the words considerable time from its press release tomorrow this is assumed to be code that they will begin raising the federal funds rate in exactly six months.  If you recall, the federal funds rate has been near zero for the last six years.

Tomorrow we’ll discover if the era of zero interest rate policy is over.  We watch intently for the market’s reaction and secondary convulsions.  Naturally, here at the Economic Prism we are eager for the ZIRP era to be over…it never should’ve started to begin with.

In fact, we find the Federal Reserve, and their cheap money policies, to cause more economic harm than good.  For one thing, they’ve led us to the place where markets are entirely dependent on ZIRP.  To take it away now will be like taking away food stamps from a dependent family.

Something bad will happen.  Defaults will occur.  A stock market panic may follow.  The derivatives market may come unglued.  Nonetheless, we welcome it…

Among the Skeptics

The Fed’s set the financial system and economy up for failure.  We don’t like it one bit.  But we’d rather purge out the rot now rather than let it build up further.  What follows is courtesy of Forbes…count us among the skeptics…

“There have always been skeptics concerning the current highs for stocks who argue the markets are juiced by cheap money — the unusually low interest rates being facilitated by the US Federal Reserve — as well as demand chasing a shrinking supply of shares and massive stock buy backs by public companies.

“When the Fed takes away the free money, the skeptics argue, normality will return to markets with a bang, financial assets will be priced accurately, and we should all watch out.

“Well, on Wednesday, we might get some clues as to when the skeptics’ day of reckoning will come, when the Federal Reserve issues its latest policy statement at 2pm.

“Traders and investors are agog waiting to see if the Fed changes the language in its long held vow to keep interest rates close to zero for a “considerable time” even after its massive bond-buying stimulus measures have ended.”

What to Buy as the Great Unraveling Gets Underway

The stock market’s had a wild ride over the last several weeks.  So far in December the DOW’s fallen nearly 600 points.  This could just be a precursor to the end of ZIRP.

At any point since the market bottom in March 2009 investors were dutifully rewarded for buying the dip.  Those days may finally be over.  Selling on rallies may be the best strategy for getting out with some capital intact.

But what to buy as the great unraveling gets underway?  Yields on the 10-year Treasury Note have fallen to just 2.12 percent.  Perhaps they could fall further.  However, it’s not likely they’ll fall more than another half percent.

Gold’s always a good safe haven asset.  Some view it as insurance against a financial, paper currency collapse.  Certainly, holding some insurance is a prudent thing to do.  Still, unless you’re a gold zealot, it’s not something to plow your entire life savings into.

Oddly, over the short term – the next six months – as the Federal Reserve moves away from ZIRP, cash may be as good a place as any.  As asset prices correct, in dollar terms, dollars become more valuable.  This also allows one to take part in the buying opportunities that’ll present themselves following the deflation of asset prices.

Remaining diversified across asset classes – stocks, bonds, cash, gold, and property – is crucial.  These things are difficult to time in the moment…particularly when extreme fear’s running rampant.  What’s more, if asset price deflation falls too far too fast the Federal Reserve may be compelled to do something really reckless.

What we mean is, even though the Fed may drop the words “considerable time” from their press release they may never get to the point where they actually raise the federal funds rate.  It could be permanently pressed to zero…and new money could be created from nothing and used to re-inflate asset prices.

After that practically anything could happen.  Most certainly, it’ll be some kind of disaster.


MN Gordon
for Economic Prism

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