<Reflation Plan >
His "reflation plan" has turned into a runaway F3IP (Fed's Fully Funded Inflation Plan). Even normally clueless congressmen now know that cat's out of the bag.
What the MoP is trying to do is the "bluff down" some of the speculative money that has piled into key commodities, with this new "bluster". The US has also imported record amounts of oil (much of which can't be refined), which gives a false signal that the energy situation is coming under control. Then they can get a month or so relief, on the inflation numbers, again a false signal. I do also think they know they have to back this new found bluster up with a little 25 bps rate hike, but are to gutless to do until "later". I think they are trying to give all the leveraged wild men in the credit market until June 30 to get their houses in order. The problem is that a lot is going to happen between now and late June.
Here are the short term challenges. If they screw around over the next few weeks, then the fundamental shortage issues that are the real basis for the inflation outburst quickly reemerge. Then if the specs get the sense that it's just business as usual, they will pile back into the commodity trades with renewed vigor. So that makes the 5/4 FOMC meeting maybe more critical than one might think. If they raised then, that might actually restore a little credibility, and keep the lid on longer on all the inflation trades that keep popping up. If they don't, then that gives speculators six weeks to go nuts and create a real commodity/ input goods bubble, right as the Train Wreck unfolds.
The second problem is the one you've alluded to, the economy will start to weaken. I reserve judgement for an update on this, but right now using the DTS withholding figures I key on, the job count for April doesn't look all that robust: 60,015 vs. 59,056 over the last eleven days. That suggest to me that when they fail to act on May 4th, and you get a so-so job report, the USD quickly weakens, and the next phase of the input goods inflationary cycle gets underway. I see little evidence China is slowing very much, they are in deep doo-doo. That's how I'm playing this now (*), and made easier (**)because of the severe discounts now put on mining stocks, and key commodities, especially Cu.
(*) bluster, fail to follow up soon enough, get hit with poor economic numbers, watch the USD head south again, get more Train Wreck developments (that most of these congressmen are aware of now), and then have no more MoP bluster and lies to work with.
(**) Versus before, when you had huge spec positions in place, which increases downside volatility and risk. That's why I cautioned everybody who was aggressive on crack-up boom plays to hedge with interest rate shorts, specifically Eurodollar or XLFs puts. Right now I would close out 75% of all ED short hedges, get aggressive on crack-up boom plays, and then look to rehedge ED shorts at a higher level as the MoP bluster wears thin, or after an initial weak economic report of significance. The short the market strategy is looking better and better. This a dangerous period, so good luck on timing. |
