FOMC: Total Absurdity Prevails

Question #1: With unemployment rates at 50-year lows, inflation below the Federal Reserve's target, housing (bankers' major collateral) at or near record highs, and stock markets within 2% of all-time highs, why in the Lord's name is a rate cut even being contemplated?

Question #2: Can there be any doubt that the Federal Reserve Board is no longer "steward of the economy" but rather "Defender of the S&P"?

Many, many years ago, long before central bankers became rock stars, and during an era of true free market capitalism, to even imagine a Fed funds rate of 2.5% was to paint a backdrop of high unemployment, negative growth verging on depression, and sagging asset prices verging on deflation. A Fed funds rate of 6-8% was associated with vigilant inflation controls, strong growth and tight labor markets, where bond market vigilantes controlled long rates by their (as opposed to Fed or U.S. Treasury trading desks) selling or buying of treasuries.

This was the last period of non-interventionist monetary policy and it was a safer, kinder world within which investors could navigate their portfolio voyages with relatively reliable, simple indicators upon which to implement strategy. If one forecast accelerating growth and constrained supply, one bought gold and oil and waited for the reactions; if one predicted Fed tightening due to overheated labor markets, one sold bonds or shortened maturities while staying defensive in equity posturing. It was a dot-plotless, tweetless, FOMC-meeting-less, CNBC-less world, when the only financial show worth watching was Louis Rukeyser's "Wall Street Week."

I suspect that by the time this missive is delivered, the Federal Open Market Committee (FOMC) has either cut or left alone the Fed funds rate, sending stocks either higher or lower, but what is painfully obvious, at least to this self-effacing scribe, is that economic performance no longer propels stocks. All stock price movements are either event-driven or interference-driven, and that might also be said for both gold and silver.

Another idiosyncratic feature of all markets in the Year of Our Lord 2019 is that these FOMC circus shows are treated like Major League baseball final games, complete with interviews, guest appearances, and revisionist commentary with the only thing missing being the guy in the yellow frock selling beer and hot dogs. In the hours that lead up until 2:15 p.m. EST on FOMC day, stocks go into lockdown as the algobots are unable to focus on anything that doesn't have the word "Fed" in it. You could have an outhouse explode in Times Square and stocks would barely budge. . .

The following charts are illustrations of just how benign the U.S. economy has become. There are no emergencies, financial crises, or political boondoggles that would prompt anyone to action in the arena of fiscal stimulus or interventionist molding of "conditions." Take a look at these four charts and ask yourselves whether a rate cut is warranted or whether a return to "quantitative easing" is required.

The answer: They are not required. However, since it is the fourth chart that governs Fed policy, a 100-point crash in the S&P would indeed prompt a call-to-arms by the Fed and you can bet that is what Trump will demand if there is any type of negative reaction after 2:15.

Nothing appears to be requiring attention here. . .

Nothing appears to be requiring attention here. . .

Lowest unemployment rate in 50 years?

Less than 2% from all-time highs!

The prior four charts show me there really is nothing urgent in the economic backdrop that requires stimulus other than the Fed trying to stay "ahead of the curve," with the Trade War being the potential catalyst for a slowdown. It is evident from Mario Draghi's actions at the European Central Bank and Haruhiko Kuroda's at the Bank of Japan that total capitulation to the sanctity of stock markets was the primary driver for policy, and that will eventually be the driver for Jerome Powell and the Fed. However, the risks will be greatest just before the markets decide that the central bankers are now, and have always been, clueless in their stewardship of the global economy becauese when that occurs, there are no arrows remaining in the stock market quiver.

The "Squid" is ready to resume its downtrend. . .

Not only do I not know whether the Fed will cut or not this afternoon, I don't particularly care. The trade, as I see it, is to fade the advance because it appears that a cut has now been reflected by yesterday's 28-point surge in the S&P. If they cut, traders will "sell the news," and if they don't, yesterday's jump will be reversed.

Ergo, the Goldman Sachs Sept. $180 puts for $3.80 appear to be ripe for accumulation. I have also put on a modest position in the SPY July $280 puts at $1.63 earlier. Remember that you should never go overboard, either bearish or bullish, going into the FOMC, and always keep a bunch of cash available in the event there are surprises.

Gold is this morning was trading down a tad and as I tweeted yesterday, despite egregiously overbought conditions for the metals and the miners with plus-70 relative strength indexes (RSIs) everywhere, prices are holding, which has to impress. The odds favor fading the metals and miners based upon the RSIs given that five prior times, big plunges followed.

Let the absurdity prevail. . .

Originally trained during the inflationary 1970s, Michael Ballanger is a graduate of Saint Louis University where he earned a Bachelor of Science in finance and a Bachelor of Art in marketing before completing post-graduate work at the Wharton School of Finance. With more than 30 years of experience as a junior mining and exploration specialist, as well as a solid background in corporate finance, Ballanger's adherence to the concept of "Hard Assets" allows him to focus the practice on selecting opportunities in the global resource sector with emphasis on the precious metals exploration and development sector. Ballanger takes great pleasure in visiting mineral properties around the globe in the never-ending hunt for early-stage opportunities.

Want to be the first to know about interesting Gold investment ideas? Sign up to receive the FREE Streetwise Reports' newsletter.

Disclosure.

1) Michael J. Ballanger: I, or members of my immediate household or family, own securities of the following companies mentioned in this article: Goldman Sachs. My company has a financial relationship with the following companies referred to in this article: None. I determined which companies would be included in this article based on my research and understanding of the sector. Additional disclosures are below.
2) The following companies mentioned in this article are billboard sponsors of Streetwise Reports: None. Click here for important disclosures about sponsor fees.
3) Statements and opinions expressed are the opinions of the author and not of Streetwise Reports or its officers. The author is wholly responsible for the validity of the statements. The author was not paid by Streetwise Reports for this article. Streetwise Reports was not paid by the author to publish or syndicate this article. Streetwise Reports requires contributing authors to disclose any shareholdings in, or economic relationships with, companies that they write about. Streetwise Reports relies upon the authors to accurately provide this information and Streetwise Reports has no means of verifying its accuracy.
4) This article does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to Streetwise Reports' terms of use and full legal disclaimer. This article is not a solicitation for investment. Streetwise Reports does not render general or specific investment advice and the information on Streetwise Reports should not be considered a recommendation to buy or sell any security. Streetwise Reports does not endorse or recommend the business, products, services or securities of any company mentioned on Streetwise Reports.
5) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in securities mentioned. Directors, officers, employees or members of their immediate families are prohibited from making purchases and/or sales of those securities in the open market or otherwise from the time of the interview or the decision to write an article until three business days after the publication of the interview or article. The foregoing prohibition does not apply to articles that in substance only restate previously published company releases.

********