Wednesday, August 24, 2011

Market Notes: Jackson Hole & Metals

Key dates for the remainder of this week
  • August 25th, 2001, is Gold & Silver options expiry: http://bit.ly/bBZmuf.
  • August 25th, 2011, the latest Gold margin hike takes effect: http://bit.ly/ocZClP.
  • August 26th, 2011, Fed conference at Jackson Hole where Fed Chairman Ben Bernanke is expected to give some direction on Fed policy.
General Notes
  • There is a lot of expectation for the Fed to do something to spur the economy. At the same time there is political pressure to cease stimulating. Either way, the market seems to have figured out that a policy of easing does not spur the economy. Expectations coupled with a general lack of confidence may result in disappointment no matter what the Fed says. They can get around this if they choose to change the method in which they stimulate and slap on a new label. However, this runs the risk of stoking inflation expectations.
  • The Fed could also stay on the sidelines and indicate that they will monitor the markets and look for further deterioration before stepping in. This route, as the policy suggests, would result in broad-based market weakness resulting in a flight from equities into bonds and potentially gold & silver, though primarily gold. Of course, the Fed would have to be careful as further weakness may topple the already weak financial sector, think Bank of America ($BAC). This play would neutralize the unpopular politics of easing, but is a serious gamble should the markets plummet. At which point, a shock & awe stimulus program would have to be implemented.
  • Of course the Fed would like to have its cake and eat it too. In this way the Fed would like to push bond buyers into stocks by pushing down the bond yield. This would push up equities and produce a negative return on fixed-income. Commodities would also be bid up, and this is where the Fed continues to run into issues with inflation and the consumer. Finally, if the Fed is successful in increasing the currency velocity we could very quickly become engulfed in an inflationary nightmare.
Overall, the Fed doesn't have a hand and can only buy time before gravity sets in. In poker terms, the Fed is drawing dead where the "turn" card will be revealed at Jackson Hole on Friday August 26th 2011. I expect the "river" to come down within 6-12 months...

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