Why The Fed Will Not Taper Soon

The market was shocked last month when the Fed declined to cut their monthly bond buying. The Fed has basically said that the economy, especially the labor market, is not strong enough to stand on its own feet. Inflation is low enough that they feel that they can safely continue to keep money supply growing.

The market had felt that the economy was doing well enough to cut back the stimulus. They were wrong.

After the Fed’s decision to not taper, the market thought that they would start the taper at their next meeting.

I’m coming to the conclusion that the Fed will not taper soon.

The current shutdown of the government will likely go on for another week or so, perhaps longer. The debt ceiling will be supposedly hit on October 17. As the shutdown continues, it starts to run into the debt ceiling. Right now the debt ceiling is not on the radar screen of the Mainstream Media. Only the shutdown counts right now.

But the longer the shutdown continues the more likely it will be lumped together with the debt ceiling fight into a Battle Royale about the role of government and spending policy.

I believe that they will find a solution at or about the date of the debt ceiling but I am afraid that both sides are currently digging in their heels and that will lead to a brutal fight around October 17.

As you know, I pay a lot of attention to seasonal price tendencies. This year, the normal seasonal calls for a 5% decline in October. The fight over the debt ceiling may be the trigger for the decline in the market.

I think the market has discounted the shutdown and it will no longer affect the market unless the shutdown drags on for another two weeks.

I am still long the market and enjoying the ride!

But I’m very nervous about the prospects for a 5% correction. As a result, I’ve got my finger on the trigger of my hedges. I’m using puts on the etf SPY. They are cheap right now. I’ll trigger the hedges if we see a slight drop in the market.

I’m long but nervous.

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