Further Thoughts Post Fed

If we could summarize yesterday’s Fed statement in a single sentence, it might well be “we are committed to producing a little inflation here.”

Now lets put some of the other policy pieces together. President Obama has said on a number of occasions that his administration’s goal is to double US exports (lets put aside for a moment the question of how they will accomplish it when every other nation in the world expresses similar intentions). Influential members of Congress are hammering the Chinese currency and trade issues. Adding it all up, here is what it seems to imply:

The US Dollar will weaken, and indeed is already threatening to break below 80. Investment stance: short the Dollar. Potential pitfalls: some sort of crisis breaks out – lets say Europe again, or a Middle East drama – and spurs a flight to perceived safety.

Precious metals and commodities, which are after all priced in those Dollars, will go up. Investment stance: long the metals, commodities and stocks of miners and producers. Potential pitfalls: economic weakness drives down demand and prices soften, i.e., prices get ahead of fundamentals.

Cost of borrowing, for firms which are able to borrow, remains extremely low. Investment stance: long the stocks and lower grade bonds of highly leveraged and capital intensive firms – banks to be sure, as well as industrial, , energy and utility firms. Potential pitfalls: some banks may yet have trouble with bad assets, some leveraged firms will have other issues. Stay with the high quality names and be sure they can generate adequate cash flows.

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