By Keith Fitz-Gerald
Contributing Editor
In a column just a few weeks ago, I wrote to you and explained that I thought the odds were high that Fed policymakers would do nothing at their next meeting - which is now only a day away.
When we last addressed this issue, the dollar was getting crushed. Gold was on a tear. Commodities - especially grains, natural gas and oil in particular - have soared. Trading volume was light and prices were indecisive. And Wall Street had already priced in a near 100% certainty of a rate cut as measured by Treasury Bonds and the fixed-income futures markets.
Those issues remain place today and are classic signs that inflation is working its way through the U.S. financial system. And while I realize that the central bank contends inflation is under control, I still feel like I'm being mugged every time I buy groceries or fill up my car with gasoline. How about you?
Why the Fed Will ‘Stand Pat'
Therefore, on the heels of yet another lackluster couple of days where the bulls just can't seem to get it together, I'm leery that the Fed is going to cut rates at all, let alone give Wall Street the rate cut it so desperately wants and even feels that it needs.
And I've got several reasons to feel that way:
- First, the Fed doesn't have to wait to cut rates. Investors are focusing on the Federal Open Market Committee (FOMC) meeting tomorrow (Tuesday) as if it is the Holy Grail - the only time it can bestow these rate cuts. But the truth is that the central bank can cut rates any time in wants. So if this were such an all-fired emergency, it could have cut them a week ago. And the fact that it hasn't already tells me that it's not going to. This notion of "wait and see" for the Fed meeting is really a bunch of poppycock created to fill airtime.
- Second, the Fed understands that if it were to cut rates, it would simply be exacerbating problems that are already getting worse - chief among them, the plummeting U.S. dollar. It's at record lows against European euro and at 30-year lows against the British Pound Sterling. I think the Fed desperately wants to stabilize the greenback. I don't think they'll be successful, but that's just my opinion.
- Third, truth be told, I really don't think the Fed actually needs to cut interest rates. In the wake of the subprime oil spill that has smeared the global financial markets in recent weeks, the central bank has tried to finance an economic cleanup operation by keeping its discount window open. By cutting the discount rate, every "financial wino" with a hankering for cheap capital already has a venue to get it so there really isn't a last call here - at least not as the Wall Street types would have you believe.
- And fourth, as a follow-on to the thought above, I personally just don't get the Fed: It's essentially printing more money in an attempt to try and fix the problem it spawned by having created too much money in the first place. How contradictory is that? I mean, how much sense does it make to try and fix a problem by doing more of the thing that caused the problem in the first place?
The Way to Play it
My take, therefore, is that the Fed probably isn't going to do much of anything at its meeting tomorrow. I believe that Team Bernanke is all too aware that while rate cuts may appease the market gods in the short term, they will wreak havoc when it's ultimately time to pay the piper.
In other words, if you haven't done so already, I think it's time to prepare for some "tough love" from the Fed.
In reality, however, there are three possible outcomes. Fed policymakers could do nothing, as I am predicting; they could cut rates, as most investors are hoping; or they could be really gutsy, and do the absolute right thing, boosting interest rates.
If everything plays out as I've suggested here, I'm anticipating a very specific reaction, and will outline for you an investment strategy that will allow you to profit from this. Here's how it will play out.
If the FOMC fails to cut interest rates tomorrow, here's how the market will likely react, and here is how you should play it:
- First, having already factored in a half-point rate cut, market will choke, backslide and even re-test its recent lows.
- However - and this is very, very important - I fully expect this setback to be only temporary.
- Longer-term, investors will find terrific opportunities purchasing shares in gold, energy and basic-materials companies (including commodities firms). Internationally diversified with a significant exposure to the "China Miracle" are good bets, too. Not coincidentally, each of my choices touches on some of the strongest global trends of our time [China's emergence, overseas economies leapfrogging the U.S. economy, growing global demand for commodities, emerging-markets wealth fueling gold prices].
So even if Team Bernanke does something exceptionally stupid - like caving in to Wall Street's demands and slashing interest rates by a full half a percentage point - you still stand a really good chance of earning higher-than-average returns in the months ahead, even if the markets do tank for awhile.
And, if by some stroke of luck [for you], the Fed does something brilliant like raising rates, make sure that you take advantage of the absolute hammering that stocks are sure to endure, and load up on the best companies in the sectors I've just mentioned.
History strongly suggests that the market will overcome any knee-jerk reaction and, once the dust settles, rocket far higher than it is today.
And history is a wonderful guide.
About the Author
Keith is a seasoned market analyst and professional trader with more than 37 years of global experience. He is one of very few experts to correctly see both the dot.bomb crisis and the ongoing financial crisis coming ahead of time - and one of even fewer to help millions of investors around the world successfully navigate them both. Forbes hailed him as a "Market Visionary." He is a regular on FOX Business News and Yahoo! Finance, and his observations have been featured in Bloomberg, The Wall Street Journal, WIRED, and MarketWatch. Keith previously led The Money Map Report, Money Map's flagship newsletter, as Chief Investment Strategist, from 20007 to 2020. Keith holds a BS in management and finance from Skidmore College and an MS in international finance (with a focus on Japanese business science) from Chaminade University. He regularly travels the world in search of investment opportunities others don't yet see or understand.