Beware of an Optimistic Reaction to Today's FOMC Minutes Release

Includes: IAU, OIL, SDS, SPY, TIP
by: Enzio von Pfeil

Recently we moved The Economic Clock™ of the United States back from a "sell" to a "strong sell". Today's Asian markets were full of hopes that the Fed is about to give America an improved health outlook. Buy at your peril!

Three things struck me in today's Bloomberg market recap. Caveat emptor: don't be naive about the dangers lurking in America's basements!

First, punters are hoping that the Fed will come out with an improved economic outlook when it releases its 31st October minutes today. There are a couple of problems with this sanguine view. What we get today is yesterday's thinking: this is what the FOMC members were thinking until they wrote their report on 31st October. No prizes for pointing out that today is 20 days later. Lots can happen during downturns, especially if they are infected by subprime messes. Besides, a more cynical view, mine, is that if the Fed is "talking up" the economy, it is doing so precisely because things are looking more insidious than the optimists want to believe.

Secondly, if people are buying because Fed Funds are being cut, think again. Ever pondered why they are being cut? Surely because the Fed is worried about growth! Which ties in to my first point: the 31st of October has long since gone.

Thirdly, some people are buying because "shares are cheap". Well, that utterance certainly is not "different" this time, is it? Ever thought why shares might be cheap? Because The Economic Time™ is and thus profits are worsening in America (sub. req.) - and this is being exacerbated by the subprime mess.

Within the context of our Economic Clock, the logic is simple: banks don't want to lend anymore, so from the credit side, the excess demand of money must rise! And if you subtract the fiver year TIP from the five year bond, the outlook for core inflation has been worsening steadily since this March.

Indeed, this March, that difference was one percentage point; now it has scooted to two percentage points. Readers know that we have warned for many moons about stagflation re - appearing in America, courtesy of cost-push inflation.

A weaker dollar

+ stronger commodity prices

+ rising unit labour costs

+ worsening growth prospects


How to Make Money Off This Idea

1. Always consult your financial adviser first.
2. Short the U.S. stock market. Buy the Proshares Ultrashort S&P500 (NYSEARCA:SDS), for instance.
3. Buy commodities, perhaps via the following ETFs:

  • Oil. Seems as if the Muddle East mess is going to worsen. That, along with winter approaching the Northern Hemisphere and energy demand rising in the likes of China and India, means that oil demand has to remain high. (ETFs Oil Securities are one vehicle: (NYSEARCA:OIL).
  • Gold. We all know that this is a "fear" investment. Besides, with non-dollar commodity currencies rising, along with the Euro, gold is cheaper for them than it is for a USD-based investor. So you might want to by Physical Gold ETFs such as IAU.
  • Platinum. Johnson Massey has just released its 2007 Platinum Review. Demand is outstripping supply, courtesy of booming car industries in the likes of China and India. Besides, labor unrest in South Africa is not boosting mining output, either. Have a look at a physical platinum ETF such as the London traded PHPT.
4. Our Hong Kong stock exchange is a quoted share, 388:HK. That share is driven totally by market turnover. So, whether our market goes up or down is neither here nor there. As anywhere, the stock exchange's profits are driven primarily by turnover.