The Next Three Months

June 10, 2011

The economy, meaning the GDP or consumption model, is struggling to say the least. The government has been pouring money into the economy trying to keep it from adjusting to its natural (equilibrium) level after the artificial high encored during the buildup of the bubble.

Now, the flow of money is scheduled to stop (stimulus money by the end of June, the Fed printing money by June 30), and reaching the debt limit ($14.2 trillion) for the 140th time. Now what’s going to happen: more money or austerity? It seems everyday the market flips back and forth.

On Monday, it appears that austerity is on the way which will reduce GDP (and revenues and profits) but the Fed will keep interest rates low “for an extended period of time.” Therefore, the markets react by buying the dollar and chasing high interest rates and selling stocks and commodities. The price swings are big but the intensity of buys and sells is not there.

On Tuesday, the mood swings and traders are convinced that the “government will do something” (more stimulus, additional tax reductions, more printing of money by the Fed, etc.) Therefore, the markets react by pushing up the stocks and commodities, selling off the dollar and high interest rate securities. Again, big price swings but not much intensity.

This may go on for the next three months or until it become clear what the government will do. Therefore, for the next three months you may be limited to very short trades or waiting for the printing presses to start rolling again. Based on how the political class has acted since 1913, I am not going to hold my breath for a balanced budget.