The old cliches stick around for a reason. “Don’t fight the Fed” is back on traders’ lips after yesterday’s policy driven rally.
On Wednesday the Fed revealed plans to keep interest rates near zero well into 2014, and refused to rule out more bond purchases.
(Einstein once defined insanity as doing the same thing over and over and expecting a different result. These guys must think they’re smarter than Einstein.)
As might be expected, the $USD took a dive on news of the Fed’s actions. Ben Bernanke wants to remind us of something: He can beat the dollar like a redheaded step child, and he’ll do so whenever we wants.
Equities of course rallied — the Dow reversed to hit its strongest levels since May, up nearly 20% from its October low — and bonds strengthened too on the prospect of forever low interest rates. Gold stocks in particular got jiggy.
There is an old familiar macro theme brewing here: Bad medicine hurting the many, while lining the pockets of a few.
Europe is in crisis, unemployment remains bleak, and the global recovery on the whole is on shaky ground. But all that malaise becomes reason to rejoice when you have a Santa Claus central bank juicing paper assets (and ignoring inflation risk) with the promise of perpetual ZIRP (zero interest rate policy).
Other risk-friendly signs abound: Strong signals from the moneyed consumer class (note Apple’s blowout earnings)… China shifting from brake back to gas pedal… and Europe looking down the barrel of a deflationary recession gun. (When is a printing press not a printing press? When you have to hide it from the Germans.)
It’s the classic policy circle, virtuous for some but vicious for the rest:
- Bad news means bad policy in the form of more stimulus
- The stimulus fails to help (and actually fuels stealth inflation)
- Speculative footballs and inflation-haven assets get juiced
- Wealthy corporations maximize dirt cheap liquidity options
- For the economic masses, life continues to deteriorate
- The powers that be say “not working, more of the same”
- Wash, rinse, repeat (until you get a crack-up boom)
Again, the intriguing play here is gold stocks for a trade. Precious metals related ETFs saw a powerful surge on Wednesday — impressive in relative strength terms — and closed out the day at the top of their ranges.
Gold stocks also have the benefit of advancing from a state of undervaluation. Gold stocks in general have been lousy performers these past few quarters, badly lagging both the market and the yellow metal itself.
Until recently, the weak performance of gold stocks made rough sense in light of a strengthening $USD, an optimistic recovery narrative led by the United States, and an investor taste for growth in a low inflation environment.
Now, though, the dollar has once again been ambushed… the Fed has poured cold water on economic optimism projections, reminding us through their actions that the backdrop is ugly… the global recovery narrative is shifting back to one of globally coordinated loose monetary policy… and the backdrop of perpetual ZIRP warrants a fresh focus on inflation protection.
(If the recovery picks up speed, monetary velocity picks up too, risking widespread inflation; if the recovery stalls, yet more stimulus will be applied, creating even bigger problems down the road.)
There are a handful of individual gold (and possibly silver) names that have attractive basing patterns, coupled with constructive breakout action. Reward to risk is favorable here for a sentiment shift that sticks. We’ll be looking to make some plays via the Mercenary Live Feed…