The Fed says it’s not QE, but its balance sheet is back above $4 trillion—and rising fast.
My gut response is to short Wall Street—wave that contrarian flag.
My brain says not so fast: Wall Street is where the inflation the Fed is creating is going.
Yes, there’s a huge flock of black swans circling the global economy. And grey swans; the Fed’s stealth QE should be ringing loud alarm bells in investors’ heads. The repo problem and/or whatever else is going on could precipitate another market meltdown at any time. It happened last year, and nothing fundamental is any better this year.
That’s not to say that I can’t see the positive impact easy-money policies are having on mainstream equities. That’s abundantly evident. It’s that I also see the whole system as dangerously fragile. As fun as the skating party on thin ice seems, I don’t want to be out there with them when the ice breaks.
That said, until it breaks, the party continues delivering solid gains to lazy ETF investors and big wins to savvy mainstream stock-pickers.
Absent an ice-breaker, a melt-up on Wall Street through the end of this year seems more likely than a meltdown.
Because we already have negative real rates in the US.
Current market odds of the Fed leaving rates unchanged in its last meeting of the year on, December 11, are 91.9%. This basically gives the Fed permission to ignore Trump and leave things as they are. When any rocking of an overloaded boat could cause it to capsize, doing nothing is an attractive alternative. And doing nothing means leaving interest rates at the 1.5–1.75% target rate, while 12-month inflation is at 1.8%.
In short, the easy-money spigot is open—both in terms of rates and QE.
And the major stock indices on Wall Street are showing us where a lot of that money is going.
So no, I don’t want to fight the Fed on this.
But I don’t want to put my skates on and head out onto the thin ice, either.
Fortunately, I don’t have to do either.
As I said, these easy-money policies in the US and around the world are good for gold and silver—and my precious metals picks.
And, if these policies reflate the global economy, they will be good for my energy minerals picks as well. I’ll be watching for that.
All of which sets the stage for what may seem like a contradiction…
A melt-up on Wall Street during Tax Loss Season could create some spectacular buying opportunities in great gold and silver stocks.
If there is a melt-up on Wall Street, the higher it goes, the greater the pressure on investors to sell losing positions to offset those gains. That goes double for short-term gains, which are taxed at higher rates. If so, we should see a lot of tax-loss selling of resource stocks over the weeks ahead.
This would come from mainstream investors and funds that diversified into the resource sector as a general strategy. The hardest selling may come from those who bought into gold and silver stocks when they shot up over the summer, and are now underwater.
At the same time, the appearance of happy days on Wall Street could reduce safe-haven demand for gold and silver—for a time—before all the money printing sends their prices higher. We may see even the best-performing precious metals stocks of this year come under pressure.
This double whammy could bring disciplined speculators some of the best buying opportunities since gold broke above $1,500.
And if not, it seems likely that I’ll still have time to buy the better ones on the dips before they take off again.
That’s my strategic outlook for the remainder of this year. Here are some tactical notes:
- There are 26 trading days left in 2019, including today. But remember that it can take two to three days for trades to clear, so don’t plan on taking any tax loses on New Year’s Eve.
- Investors who have realized major gains will be looking to take tax losses on their losing positions during any rallies in these remaining days.
- When prices aren’t falling much, investors deeply underwater tend to wait and sell late in Tax Loss Season, hoping to get better exit prices.
- When prices are falling, investors deeply underwater tend to sell early in Tax Loss Season, hoping to get out before prices fall lower.
- Remember that your own gain or loss on a stock matters only for your own tax loss decisions. When trying to determine if a stock is likely to see a lot of tax loss selling, you have to look at its performance over the last year, or however long it takes to turn over the float, to see if most current shareholders are likely to have unrealized losses.
- Investors taking tax losses on large positions on days when gold and silver rise could create great buying opportunities on those days—so beware of missing opportunities by checking only on down days for precious metals.
The last two points are key—and why I’m still waiting for the market to come to me, rather than throwing the towel in and buying the stocks on my list today.