NEW YORK ( TheStreet) -- I've had a few changes of mind about the Fed.If I have to choose a sociopolitical label for myself, I'd have to pick libertarian, although some in the Tea Party make me nervous. So I was instinctively against the Fed since QE1, and later QE2. Then as time went on and the inflation I feared never materialized, I began to rethink it. QE1 was quite necessary, unlike the panic bailouts done by the Paulson administration. QE2 did push inflation expectation to uncomfortable levels and caused worldwide commodity (especially food) inflation, which was an important trigger for the Arab Spring that seriously damaged U.S. interest in the Middle East, probably permanently. But the Fed had its eyes on the ball. I especially admire Chairman Bernanke, in retrospect, for calling the inflation pressure "transitory" in early April, 2011, which I was guilty of ridiculing at that time. He turned out to be right. Inflation expectation started to come down by the end of April. Maybe he had some pretty darn good forecasting models and he believed it. But in retrospect the five-year inflation expectation never quite reached 2.5%; if it had and stayed there for more than a week or two, he probably would have been forced to do something about it. Here it is again, my favorite graph, updated.
In the Fed's own words from the announcement, "information received since the Federal Open Market Committee met in August suggests that economic activity has continued to expand at a moderate pace in recent months." Inflation expectation had been going up above 2%; at close of Thursday it surged to 2.27%. Why now? Why not wait for some clear sign of economic weakness before acting? Why switching the focus to unemployment at this point in time? It is theoretically possible that Bernanke has at his disposal some amazing forecasting model that sees a pending Lehman-class disaster, say Greece or Germany exiting the euro or Spain defaulting, or severe economic slowdown in the near future. Even then it doesn't make any sense to take pre-emptive action for two simple reasons: 1) you just don't know until it actually happens, and 2) pre-emptive disaster prevention before anyone sees the danger has the problem of having nothing to show for your success, by definition. It's economically risky and politically stupid. Another fact is that the Fed's balance sheet automatically shrinks if they do nothing, as the bonds they hold accrue interest, mature or get pre-paid. But the rate of this shrinkage is only about $10 billion a month. By adding $85 billion a month, as announced for QE3, the Fed's balance sheet will increase $75 billion a month net, indefinitely. Even the most wild-eyed, far-out QE junkie dared not to expect this. Some may say "indefinitely" also means he can stop any time. True. But the burden of proof for deviating from $40 billion is now very high, especially on the low side, given Bernanke's explicit promise that he will be late rather than early in stopping the stimulus. It's also odd that they didn't even bother to leave some flexibility in schedule, something along the line of "about $40 billion, subject to the committee's discretion taking into consideration any new economic data." No -- $40 billion, period. This is just absurd.
Political MotiveThe only rational explanation left is election politics. This is the only factor with a hard expiration date. And it neatly explains the sudden shift of focus to unemployment rate. Remember how everyone was saying that no president gets re-elected when unemployment runs above 8%?
Now this is truly sickening. I dislike Barack Obama and Mitt Romney equally. It's not about them individually; I'm sure they both are great guys. It's about the party establishment and politicking. As long as it's not George Bush or Sarah Palin. And I understand the Fed's independence can never be 100%. But there is a meaningful difference between a clandestine lover and a streetwalker; the former pretends to have a sense of shame and tries to protect the partner's ego. OK, now we got the ranting part taken care of, let's get back to trading. RIP Fed. In the short term, risk-on seems quite certain. Long gold, e.g., via SPDR Gold Trust ETF ( GLD), stocks, e.g., via SPDR S&P 500 ETF ( SPY), commodities, e.g., via United States Oil Fund ETF ( USO), PowerShares DB Base Metals ETF ( DBB), or PowerShares DB Agriculture ETF ( DBA), short USD, e.g., via PowerShares DB US Dollar Index Bullish ETF ( UUP) or the bearish version ( UDN) and long every other major currency.