Mike Conlon
Senior Instructor
instructor@mywealth.com
All eyes are on Bernanke and the FED this week as investors are seeking a little more clarity over Federal Reserve Policy going forward and what they plan to do with regard to interest rates. Couple that with the G-20 meeting this week and growing concerns over the rising US fiscal deficit and you have a potentially explosive situation.
However, if you’ve been watching the markets as of late, you would know that the potential for fireworks is highly unlikely. The “Ben Bernanke Show” is in full effect and market contrarians and early participants go through this exercise with every FOMC meeting like clockwork. It basically starts with the US dollar showing signs of early strength, followed by a drop in commodity prices and lower US equity futures. Next, the claim is made that the “fundamentals” are coming back into play and that inflation may be rearing its ugly head. This naturally leads to the conclusion that the Fed may have to start raising interest rates, which send the US dollar higher and all other markets lower—temporarily. I wrote about this earlier as right now there are essentially two trades out there.
*****Question of the Week! *****
(Take a shot!!….Chance to Win a FREE Currency Trading Course (VALUE: $99.00!!) by Emailing Us your answer no later than Friday 9AM EST and 3 Names will be randomly picked and named as Winners!! (Must be a blog subscriber) Which currency do you think will perform the best in the next 3 months? a) US dollar (USD) b) British Pound (GBP) c) Japanese Yen (JPY) d) Euro (EUR).
Here’s what’s really going to happen:
There is not a snowball’s chance in hell that we’re going to hear anything remotely related to rising inflation. In Bernanke’s mind, we need to RE-flate before we IN-flate. There is no chance that the FED is going to raise rates in this session and it is highly unlikely that he’s going to change the language going forward. Right now the market is still extremely fragile so anything remotely related to the possibility of higher interest rates could send global markets into a death spiral.
Another factor to be considered is that market players are concerned that the FED may signal the end to the stimulus plans. Again, not gonna happen. Bernanke is so concerned with avoiding the Great Depression 2.0 that he will not spook the markets. And even the euro contingent of the G-20 is calling for continued stimulus. It’s more probable that he is going to try to bore market players and break the will of those who attempt to fight the Fed then take action that will potentially harm markets.
Lastly, concern about how the FED is going to wind down its quantitative easing and the potential impact it will have on interest rates is causing investors to take some money off of the table. Bernanke just announced that the recession was likely over last week, so it is also highly unlikely that he would do anything this soon to counter that claim. Today’s markets are more about perception than reality.
So expect the US dollar to strengthen and equities and commodities to weaken going into the FOMC meeting. Smart traders are lightening the load and taking profits, nothing more. While everyone loves to call a market reversal, dollar strength means trouble for stocks and Bernanke just won’t let this happen.
And after the FOMC meeting’s conclusion, be prepared to do just the opposite. The trend for the US dollar is clearly down and should continue for some time, and there appears to be room for stocks to move to the upside.
We’ve all seen this show before.
To learn more about how FED policy can affect your investments, be sure to check out our courses.
