While Fed Meets, Expect Market To Be On Hold

The trading volume for today and tomorrow before the Fed meeting should be light, just like yesterday. Market participants tend not to bet big before the resolution of the Federal Reserve meeting.

Obviously, I don’t expect Fed will raise interest rates in this meeting to “combat inflation” - as if that’s really their goal. In fact, I doubt that they will raise interest rates in August either.

The Fed is in a bind between “combating inflation” and reducing the impact from the burst of housing bubble. Unfortunately, I really can’t see what good news Fed can bring to this market. From the recent past, markets simply go down further every time a Fed governor opens his mouth.

In fact, to be a Fed governor, you really have to be good at talking. How else are you going to talk down inflationary expectations, while every one on Main Street is getting used to all the fuel surcharges in all kinds of services including pizza deliveries? Therefore, I’m guessing that the main message from Fed this year will be:

1. Slowdown will temper inflation.
2. If (and only if) crude oil stops going higher, the year-to-year inflation contribution from crude will no longer contribute to the overall CPI. (Yes, if crude stays at $130 from today to next June, there is no inflation, or price increase.)

Unfortunately, in the coming year(s), there will be a lot more of cost passed through from basic materials all the way to the end consumers, since businesses are realizing that high price of crude oil is here to stay. The cost-push inflation will be taking the rein of the economy. At that time, I’m guessing that the main message from Fed next year could be arguing the pass-through of PPI to CPI will “soon be over” and “not expected”.

As I argued two years ago - before the housing bubble burst - inflation would be heightened for the next decade to come, in order to alleviate a dramatic fall in the inflation-adjusted housing price to a much less price adjustment in the nominal housing prices. The primary goal or the hidden agenda from Fed will certainly be creating lots of inflation, especially the most needed wage inflation (to support housing markets).

However, wage inflation is very hard to come by in the globalized economy without lowering US dollar in the process. Poor Bernanke really has the hardest landing job ever in the US history. He will need to do a lot of double talking, losing his credibility all the way until he gets replaced eventually.

I hope that the markets or PPT (Plunge Protection Team) will perform a dead cat bounce again. I have not hedged my long bets enough at all. Earning season is just right around the corner . I’m expecting more dreadful writedowns from financial companies and more economic slowdown from all the companies.

Better get out of the way before all the bad news come crushing the markets down.

Comments

[Whidbey]

Right on, and there is no deliverance in sight. PM, owned real estate, commodities (softs), energy and TIPS are the hideouts in what appears to be a seriously declining economy. I can not see what stems the selling or what might turn the corner on housing. I fear it is just the start of the journey down. Gird your loins.