Taper Talk and Safety Plays

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Keith Fitz-Gerald was one of the few market gurus to accurately predict that the Fed would not begin tapering at its latest meeting. Here, he updates his forecast for Fed action and what that portends for the markets.

Steve Halpern: We are here today with Keith Fitz-Gerald, editor of Money Morning and Strike Force. How are you doing, Keith?

Keith Fitz-Gerald: I'm doing great. Thanks for having me back.

Steve Halpern: No topic has received more attention recently than the Federal Reserve and expectations for tapering, yet across the board, the financial media and Wall Street analysts were in agreement the tapering would begin last week.

The only real contention was how much tapering would occur, yet you stood alone in your forecast in June, July, and August. You consistently said that this thing would not ease. What led you to be right, when everybody else was so wrong?

Keith Fitz-Gerald: Well, you know, thanks for pointing that out. It's tough to be right all the time, so really what I tried to do was just apply the benefit of common sense. The Fed is busy chasing its tail. It's using antiquated statistics that are badly out of touch with the markets that we live with today.

Investors have become dulled to the concept of cheap money, and the importance of actual earnings and profits, which is something that we talk about incessantly in the Money Map Report.

Because, good earnings lead inevitably to good prices, and there's a linkage that is absolutely immutable and cannot be broken no matter how hard the Fed actually tries.

I simply took a look around Steven, and said, this is not going to change. The Fed cannot take its foot off the gas, because the market is addicted to cheap money.

Steve Halpern: Now, at some point, the Fed is going to begin tapering. Where on the horizon do you see that occurring?

Keith Fitz-Gerald: Well, there's no question they're going to, and in my mind, all they've done is delayed the inevitable. Whether that inevitable is next month, next year, five years from now, we don't know. They're going to play the music for as long as they can to keep the party going.

The sad thing about this is that the next opportunity we're going to have to look at is, I think, the December meeting, which puts this into whole life. I think we're going to see, perhaps a rally into fall.

It depends on now, the budget battle and some other things going on in the Middle East, obviously, but I think, my take on it is, the Fed is going to have to pick up the pieces and they're going to view further quantitative easing as the only means available for them to do it.

Steve Halpern: Now fast forward to the point where the Fed does begin tapering; whether or not that's at the next meeting or a following meeting. What impact do you think will that have on the stock market and are these delays going to even change that impact when it does occur?

Keith Fitz-Gerald: Well, let's tackle the second question first. I think the delays are actually going to make the impact of it worse when it does happen. I think what is going to happen is we're going to get the equivalent of a two-year-old temper tantrum, only it's going to be a taper tantrum.

We got a little taste of that in, I think it was April or May of this year, when Bernanke floated a trial balloon out there, mentioning that he was even thinking about doing tapering.

The markets really didn't like that. All we have to do is look to Japan as to an example as to what is actually going to happen, and I think there's going to be a sharp violent correction when that happens.

Steve Halpern: Now, are there any investment strategies that you could recommend, or that you put in place for your readers to help counter that, or to help add a level of safety to overall portfolio planning?

Keith Fitz-Gerald: You bet. In particular right now, you've got to think like a boxer. You've got to be the old Mohammed Ali; look like a butterfly and sting like a bee, or whatever that saying was that he used to use. He always thought in terms of one-two combinations.

Short-term/long-term is how I see that playing out for investors. To me, the fact that Bernanke blinked, points out two opportunities for investors right now. It made it clear that every central banker on the planet is guilty and has his hands into this quantitative easing.

I like the PIMCO Strategic Global Government Fund. The ticker is (RCS). The reason I like that, is it pays a hefty income; it's a bet on increased stability through further quantitative easing.

On the other hand, I think longer-term, it is very clear to me that Bernanke is in the early stages of losing control of the bond market.

What that says is that rates are ultimately going to rise, and I think they're going to rise for a very long time to come, once they gain that momentum. My favorite investment to play, that is the ProShares 20+ Year Short ETF. The ticker is (TBF).

Again, these are short-term/long-term, fake-left and hit-right combinations of things. I don't believe investors need to make an all or nothing decision right now.

There's plenty of time for this to play out, but it is going to be a monster move once it gets started. I certainly want people to take advantage of it, rather than be taken advantage of.

Steve Halpern: Well, we really appreciate your insights. Thank you for joining us today.

Keith Fitz-Gerald: It's my pleasure. Thanks for having me, Steven.

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The expert featured in this column, Keith Fitz-Gerald, may or may not own positions in any investment vehicle mentioned here. The views and opinions expressed are his or her own.