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Near-Term Opportunity, Courtesy of the Fed

by Lobo Tiggre
Tuesday, July 23, 04:07pm, UTC, 2019

Federal Reserve officials have gone into their blackout period before the July 31 FOMC meeting. That means there won’t be any helpful—or hurtful—Fed comments on economic developments before the meeting.

This in turn means that financial talking heads will flood us with guesses about every scrap of economic news until then—and bold predictions about what the Fed must announce on July 31. These pundits will do their best to grab attention with the most sensational headlines they can come up with.

The truth, of course, is that none of them really knows.

Neither do I.

But a reader just reminded me of something important that few Fed watchers are paying any attention to. I had tweeted a comment on the budget deal Trump and Pelosi announced today. They agreed to remove debt obstacles so the US government could spend $2.8 trillion over the next two years.

Key point: this gargantuan spending spree is funded by debt—debt the government must pay interest on.

This would explain the Fed’s eagerness to cut rates in the face of a supposedly booming economy.

The Fed may say on July 31 that it’s cutting rates as insurance against economic contagion from abroad. But it’s clear that the US government needs low interest rates to fund record deficit spending, regardless. That need must be exacerbated by all the nice foreigners who used to buy US bonds being less inclined to do so as a consequence of the trade wars.

It may be that it simply does not matter if the US economy is as strong as suggested by the rosy employment reports, record highs on Wall Street, and other upbeat data.

The US government’s interest payments may trump everything else.

(No pun intended.)

If this is correct, then “good news is bad news” market reactions will be in error. It wouldn’t matter how much good news—even very real and material good news—there is. The more the US government borrows, the greater its need for low interest rates. The Fed’s hands would be tied.

This could set up an interesting, very near-term opportunity…

Note that I don’t call it a speculation. I’m not talking about a solid trend here with predictable consequences, which is the basis for my type of speculation. What I’m bringing up is more of a gamble—a toss of the financial dice only to be considered with play money.

If US interest payments on debt are as important as I think they are, it sets up an asymmetrical risk situation until July 31.

Any time stocks in general sell off on good economic news could make for nearest-term gambles on quality stocks to be liquidated on July 31.

Of course, the same factors would present other, less risky opportunities:

  • Any time gold and silver sell off on good economic news before the FOMC news would be an opportunity to add to our long-term holdings of these monetary metals.
  • Any time gold and silver stocks sell off on good economic news could make for excellent entry points for those speculating on a precious-metals bull market that will last far beyond July 31.

Please note that I’m not telling anyone what must or will be. I’m just pointing out opportunities I see—if it’s true that most investors are overlooking something important.

This aside, there is one thing I do think is highly likely up to July 31: greater volatility.

Whatever the Fed does, it will be a big deal. I expect Mr. Market to exhibit strong bipolar behavior in the interim, alternating between greed and fear like a ping-pong ball.

Whether or not the interest on US debt matters as much to the Fed as I think, the volatility generated by financial fear and greed mongers can present buying opportunities for those of us who are speculating on more solid, longer-term trends.

Watch for it.



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