FOMC Rationalizations Spark Dollar And Stock Market Drop

[The following is from The Dollar Vigilante’s Senior Analyst, Ed Bugos]

In our time, political speech and writing are largely the defence of the indefensible. Things like the continuance of British rule in India, the Russian purges and deportations, the dropping of the atom bombs on Japan, can indeed be defended, but only by arguments which are too brutal for most people to face, and which do not square with the professed aims of the political parties. Thus political language has to consist largely of euphemism, question-begging and sheer cloudy vagueness. Defenceless villages are bombarded from the air, the inhabitants driven out into the countryside, the cattle machine-gunned, the huts set on fire with incendiary bullets: this is called pacification. Millions of peasants are robbed of their farms and sent trudging along the roads with no more than they can carry: this is called transfer of population or rectification of frontiers. People are imprisoned for years without trial, or shot in the back of the neck or sent to die of scurvy in Arctic lumber camps: this is called elimination of unreliable elements. Such phraseology is needed if one wants to name things without calling up mental pictures of them.” George Orwell from Politics and the English Language

In his essay on politics and the english language after the second world war, George Orwell wrote that the decay of the english (or any) language was no accident. Its deterioration was not out of mere laziness or cultural accents of the day but from political intent. The use of dead metaphors, cliches, and too many euphemisms are convenient if you are trying to obscure or confuse your listeners. But they are no way to be transparent about your meaning.

I was reminded of Orwell when listening to Yellen drone on and on about the many reasons the Fed should not raise interest rates despite acknowledging the fact that the economy was still growing “moderately” and “labor market continued to improve, with solid job gains and declining unemployment.” We might add some of the facts she didn’t acknowledge, like how the Fed is in its seventh year of ZIRP (0% interest – Zero Interest Rate Policy), or how stock and bond markets are priced for solid growth.

The old girl was looking for all sorts of excuses for staying put… the dollar is too strong, the global economy is too volatile, the labor market has not been fully repaired, inflation is still low…

She just went on spinning a web of euphemistic nonsense to obscure the fact that her own zero interest rate policy (not actual growth) is responsible for manufacturing sky high asset values.

Why else do you think she won’t raise rates? Well, aside from hiding the government’s insolvency. She knows that the Fed fuelled this asset boom, not China.  In fact, this is the most centrally inflated asset boom ever produced in the US. I think that makes it more vulnerable.

Analysts who were looking for a rate hike were confused. They reasoned that the Fed will push it off to the December meeting. Apparently, October is too soon. I am skeptical that it will raise rates at all this year but especially not going into Christmas? But then again, it is Shemitah!!

What amazes me is that they still have this in the statement, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.”

Are you joking? They are NEVER going to allow interest rates to normalize, NEVER!

That means they are going to keep inflating.

And I think they are way underestimating the inflation trade, especially if the dollar collapses.

It appears to me that Yellen has her mind set on following the path that Greenspan carved out for her: one of hiking the target rate gradually, 25 basis points each meeting. But the interest rate suppression the Yellen Fed has orchestrated is way more inflationary than Greenspan’s, and when the price inflation genie wakes up, if the Fed is not prepared to tighten faster, it will slip through its fingers and run away. Remember how it started to run away in 2007 before one too many rate hikes back then? This time they will be way more behind the curve out of the gate.

The session was volatile with US equities initially falling, then rising, then collapsing into the final hour of trading. The yield curve steepened as short term yields fell more than longer yields, and the dollar got nailed… giving gold and the commodity complex a big boost. In fact, even when the stock market was up intraday the gold stocks led the parade along with housing and energy issues. The banks never made it into the green. The inflation trade was alive and well Thursday.

The pessimism didn’t get a chance to unwind very much in preceding days, and there is still a chance that the falling dollar will initially give equity bulls a reason to buy the stock market.  Although the Dow is currently down nearly 300 points and looking very tenuous.  This is a very telling sign that the market is reaching the end of its rope as it drops substantially after another very dovish Fed statement.

For the moment we are maintaining our short position against US shares through the purchase of a leveraged bearish ETF (subscribe here for our exact recommendation and to be kept up-to-date in realtime on changes).

I’ll watch closely. I’m looking for a lethargic rally and an increase in bullish sentiment in coming days. If there is a sign that the rally might accelerate or that the Fed may expand money again we will follow this up with an alert to get out of the trade. For now, it’s worth riding this out.

The gold price rally was refreshing but subscribers will recall my resistance parameters. The trend is down and the market could go lower. The bulls have a lot of work to do to turn that trend around.

I have been creating the ultimate gold stock portfolio over the past few years. The sector has been in decline so many of the new ones are down from the dates that we added them. But it is almost finished with the last four names to be announced this month in our premium service.

It is difficult to predict a bottom. I can tell you that this has been the longest and most wicked gold stock bear market in the past century. Arguably worse than the one in the late nineties.

The values in the sector are incredible. If you are a value investor it’s a great sector to buy.

I’ve designed the portfolio deliberately to have minimum geopolitical or geotechnical risk; my picks are mainly in politically solid regions (outside the US) and are largely low cost producers.

You can mark my words that this portfolio is going to be up 300 to 500 percent in the next few years. That is not a guarantee. It is just what I believe is going to happen. I’m convinced of it.  And with gold currently up 2% today and the Dow down nearly 2% it looks like the winds have finally shifted in favor of the miners.

Don’t forget to to subscribe or if you are already a Basic subscriber, upgrade to the Premium newsletter to get my new picks.

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Ed Bugos

Mr. Bugos is the Dollar Vigilante's Senior Analyst and founding partner. He is an Austrian economist and has been a dedicated investment professional since 1989, having started his career as a stock and futures broker on Howe Street at one of Vancouver's leading brokerage firms. Ed retired in 2000 warning clients about the tech bubble, and launched an online digest forecasting gold's revival and bull market when it was just $285. He saw the value in bitcoin as a potentially sounder alternative to the present fiat currency system as early as 2011 before many of his Austrian peers. Ed has built a career record of being early on major economic trends, bullish and bearish.

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