Where Would The Markets Be Without the Fed?

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.

My recommendation?

• 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.

Related Articles and News:

• Money Morning:
  Pension Schemes are The Latest Gigantic Rip-Off
• Money Morning:
  LIBOR Manipulating Banksters Get a Slap on the Wrist
• Money Morning:
  Central Banks are the Problem
• Money Morning:
  The Markets Are a Stacked Deck in a Rigged Game…But I Can Teach You How to Win