The Federal Reserve Cordially Invites You to Another Round of Musical Chairs

Market musings this evening:

• The markets slow and steady climb for the year continues and looks like it should take us to 1250 at some point in the year thanks to free money ala gentle Ben. The temptation here is to leverage up now with cheap money and buy assets before they become more expensive. Much like easy money during the tech crash and the real estate crisis, the Fed is offering you an opporuntiy to ride the bubble up—just this one last time…
• The biggest market risk appears to be a sudden rise in interest rates as the bond market prices as the market gets indigestion. As money moves out of cash and “reverse capitulation” occurs, rates could move higher.
• Gentle Ben could get a shock particularly if bank lending starts to pick up dramatically. This moves banks out of treasuries and could boost mortgage and treasury rates quite high. The government balance sheet is too high to afford anything other than a reflation of assets. They’ll try to avoid CPI, but real estate assets need to keep rising to avoid the worse case scenario. So far so good with the Fed’s “theoretical experiment”.
• Tech, financial, natural gas (companies not commodity) have been my favorites for a while now. This continues to be the case although it’s quite likely natural gas equities may get a downtick. Particularly some of the speculative ones I am in like Westport, Apache, and CLNE.
• The second largest risk is rising trade tension with China that leads to a trade war. This has kept me from jumping in on commodities as these will be hit materially hard if there is some kind of problem.
• Currency positions-- short UK Pound, Euro.
• Once the Fed stops buying mortgage rates, real estate should double dip at least somewhat with most of the pressure on the upper end.
• German Exporters look great as an investment-- good theme for a time.
• I consider myself a huge believer in free trade, but the IP law and non tariff barriers in China might have passed muster when their economy was small 10 years ago. However, now it’s simply to large and it’s creating large disruptions. China’s trade should continue to grow but both countries needs to find a way to make capital and trade flows a little more balanced in the interest of both countries.

Be careful not to the last one city in the chair, but in the mean time enjoy music.

Disclosures: Long all the equities mentioned, tech (networking, wireless), financials, and gold.