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We've arrived. We're exactly in the middle between here and there.
The problem with being here is the "there" part.
I'm talking about where the markets are and where they're going next. Is "there" backwards or forwards? Are we coming or going from here?
Before I give you my own forecast, and recommendation, let me say this about that…
Here are the two best forecasts I've ever heard:
- "It will fluctuate," which was what J.P. Morgan famously answered when asked what the market would do, and
- "I cannot forecast to you the action… It is a riddle, wrapped in a mystery, inside an enigma," which is what Winston Churchill famously said, not about the market, but about Russia. (The full first line is, "I cannot forecast to you the action of Russia.") But you get the picture.
American markets are touching their highs. It's as if everything is clear and sunny. It's as if forecasting is as simple as looking out the window and calling out what you see.
It's clear and sunny. Haven't you looked outside? If only it was that easy…
But when you do look outside, let's say, through a window, you only see in one direction. The question can then be asked, is the weather you're looking at coming or going, or is it here to stay?
America, and indeed the global financial markets, came to the precipice of a cliff and barely caught their balance before plummeting into an abyss so deep and black that no one knows where it would have taken us. But my guess is to Hell.
The rope that held us from going over was stimulus, massive stimulus.
That stimulus was never mopped up. It's been left out there like water on everything after the fire has been doused; and there's more coming.
The Federal Reserve, which isn't playing just 18 holes, but seems like it's playing a marathon round of swinging hard and gently, but constantly swinging, is teeing up another ball with some little marking that reads QEsquared, or something like that.
Here's my guess on what the Fed is going to do…
They're going to stop telling us what they're going to do. They're going to keep us guessing about how much of the stimulus hose they're going to unravel.
It's an election year, you know. That means they can't take sides. So, they're going to do what they do under the cover of, "We're not political; we're going to do what we're going to do in such a way that you idiots out there won't know and make a judgment call on either candidate or Party."
You see, they did that once. It became known as the Saturday night massacre. That was back in 1979, when Paul Volcker, then the Fed Chairman, on a Saturday, decided to shrink the money supply and not target interest rates as a means to kill inflation which was ravaging the economy and the country.
It worked, eventually. But it didn't work very well for incumbent Jimmy Carter (there were a lot of other things that weren't working for J.C. at that time), who bore the brunt of quickly rising rates and lost the election to a guy by the name of Ronald Reagan.
The point is, ever since then, the Fed has been aware of their power to move the electorate. So, they're going to use their apolitical posture as cover to hint that they're going to just make QE a forever program that they're going to employ until either the markets make new highs and keep going or the economy grows at 3% to 4% per year, forever.
Oh, and China is about to do some of the same unraveling of its stimulus hoses.
What does all this stimulus have to do with the market direction? Everything.
Without it, we'd be 50% lower across the board. Yes, I am saying that the markets are 50% higher than they would be without the Fed's pump priming. The same goes for the rest of the world.
But here's the problem with picking the direction, or forecasting the weather. Nature finds a way. The natural order of markets can't be messed with forever.
God help us when Mother Nature shows her wrath, and she will.
Europe is still a mess. Take away the stimulus there, and the world folds. Because China will fold, and the U.S., no longer an island, will fold too.
The problem is fiscal discipline. It's coming. And it's aimed at mopping up some, or a lot of that stimulus spillage that's been floating higher and higher spending and higher and higher deficits.
So, what's my forecast?
Either the markets will be stimulated higher, which is most likely under the present circumstances, or they will fall, once we're spanked with the fiscal discipline paddle, or we'll stay right about here in Goldilocks land – where it's not too hot, not too cold.
- Straddles. Why? Because the markets will tend to fluctuate, and right now they are a riddle, wrapped in a mystery, inside an enigma. I'd be buying straddles here – long horizon, out-of-the-money straddles.
- And I'd be selling calls on all my nice dividend-paying stocks and buying them back if they get called away and then selling a lot more calls on them.
Nothing goes up forever, especially when the hot air is rhetoric.
Be careful out there.
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About the Author
Shah Gilani boasts a financial pedigree unlike any other. He ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board of Options Exchange. When options on the Standard & Poor's 100 began trading on March 11, 1983, Shah worked in "the pit" as a market maker.
The work he did laid the foundation for what would later become the VIX - to this day one of the most widely used indicators worldwide. After leaving Chicago to run the futures and options division of the British banking giant Lloyd's TSB, Shah moved up to Roosevelt & Cross Inc., an old-line New York boutique firm. There he originated and ran a packaged fixed-income trading desk, and established that company's "listed" and OTC trading desks.
Shah founded a second hedge fund in 1999, which he ran until 2003.
Shah's vast network of contacts includes the biggest players on Wall Street and in international finance. These contacts give him the real story - when others only get what the investment banks want them to see.
Today, as editor of Hyperdrive Portfolio, Shah presents his legion of subscribers with massive profit opportunities that result from paradigm shifts in the way we work, play, and live.
Shah is a frequent guest on CNBC, Forbes, and MarketWatch, and you can catch him every week on Fox Business's Varney & Co.