In other words, this is a 180 degree turnaround for the Fed... and the window of opportunity to raise rates is shut for now. It will probably remained that way until the 2016 presidential elections are over.
What are the implications for investors?
1. Rate differentials between US/Euro US/Japan will shrink or at least will stop increasing. This means less money available through carry-trade activities (poor for US equities.) This also means a weaker US$, which is not good for China, Japan and the European currency debasement race. The race to debase currencies is in full swing, and this is how the market reacted on Friday.
This of course can only boost gold, which had been in a continuous downtrend because of belief the Fed would raise interest rates.
With the Fed's 180° on interest rates - with the NIRP idea on - I suspect the downtrend in gold is over. Gold is a buy here. The threat of negative interest rates in the largest market (US Treasuries) in the reserve currency (the US$ still makes up more than 60% of all exchange reserves and more than 87% of all international commercial settlements) is a very bold move.
China has accused the US of being responsible for its market crash by indicating that it would hike US interest rates. This NIRP idea is a clear menace against Japanese, European and Chinese exports. Will China now accuse the US of NOT raising rates and therefore undermining its exports?
2.US Treasuries look very attractive now that the Fed has performed a U-turn. But what will happen to Treasuries held by China? The Chinese monetary devaluation has forced China to sell US Treasuries in order to compensate for the capital flight out of the country. Will China step in against this capital outflow? Capital controls mean that the Yuan will not be accepted as an international currency. In other words, if China starts in this path, it will not be able to deter the influence of the US$. The consequence is that China will continue to sell US Treasuries.
US Treasuries will be buffetted by both positive and negative currents. However, I think that for the coming days the Fed U-turn will be overwhelmingly positive for Treasuries. Last week's bounce "has legs."
Then, money will move into defensive sectors such as utilities and REITs, which will not fall victim to China's selling of US Treasuries.
In other words: The Fed U-Turn is going to pull money out of investment funds and equities and back into Treasuries and defensive sectors (including gold.) is this the Fed's intention?
If you look at the figures below - concentrating on the MF - you will see that on Friday, the XLU MF was rather positive, while the 20DMF and the XLE MF were mostly negative (before the end of day options expiration manipulation.) I think this is the beginning of a move back to defensive sectors and Treasuries because of the Fed, just mentioning the possibility of NIRP...
This is the easy strategy for pension funds that "had to" move into equities. Now, they can come back to what they do best: chase income. This means weak equities ahead!!
3. Commodities are under heavy pressure again... because the Fed just told us that the world economy is not in good shape.
(Did you notice that the silver and gold MF are moving in opposite directions?)
Conclusions:
The Fed's decision not to increase US rates, to talk about NIRP and to stress the international situation will force money back into defensive positions.
The Fed's decision - which was supposed to be positive for equities - could end up being the final nail in what remains of the current bull market. The next step will be QE4 just ahead of the US elections.
The good point here is that while this general Fed reversal is in progress, there will be many opportunities to make good money.
As I have repeatedly shown, EV and the EV based Money Flow are very good tools to spot investment opportunities:
- When the market falls back, taking most equities with it, EV is a good tool to see which equities funds are keeping or even accumulating.
- When the market bounces back up, EV is also a good tool to detect the stocks and sectors that are sold in strength.
This is how I have been able to make the returns shown below.
"Follow the money" works!
