Why the Fed's Out of Options - Thanks to Crude, Food, and You

The markets presented quite the twist on Thursday, when the much anticipated relief rally got whacked in the face.  Despite the hysterics and fear, though, US stocks did not break through their previous near term lows.  If I were a betting/trading man (ha) - I may be tempted to take a short term flyer on the long side:

The S&P 500 appears to have some support around 1120 - for now. (Source: StockCharts.com)

Investors who rushed to get long a couple of weeks ago - even if they had timed the bottom successfully - were early, if they held their positions longer than 3 days.

Where have we seen this movie before?  How about the "flash crash" from the spring of 2010.  At the time, it was touted as a tremendous buying opportunity, thanks to some insane computers.  In reality, those "freak lows" were not only tested, but exceeded, within the next few months:

May "flash crash" buying opp?  There was no hurry to pile back in - a lower low was on the way. (Source: Google Finance)

With Jackson Hole just around the corner, Bernanke is in quite the pickle...he's out of bullets!  He can't reduce rates, because they are already at zero (and pledged to be there through 2013!).  Contrary Investing favorite Jon Lederer pointed out to me last night (over a few beers of course) the stark contrast from the early 1980's recession, when the fed has 15 whole points at their disposal.

QE has been tried - twice - and if not backfired, then at least failed.  While WTI crude has backed off, Brent (the goo that powers the rest of the world) is still over $100:

After all the carnage we've seen in the markets lately, Brent Crude still sits above $100. (Source: Barchart.com)

The most disconcerting charts, though - especially to leaders and policy makers - should be the prices of food.  If QE2 did anything, it sure lit a fuse under the price of food - check out the rocket shots put in my corn and soybeans:

Corn, 'Beans have been rip roaring to higher prices since Crazy Ben starting printing a second time. (Source: Barchart.com)

There's not much room for yet higher prices here, before we see some serious social unrest.  To paraphrase DailyWealth's Brian Hunt - people will put up with a lot of crap, but once they are faced with high food prices, they will take to the streets.

Exhibit 3 why QE3 would be a challenging call - the dollar.  I had thought that a return to these deflationary conditions would trigger a corresponding rally in the dollar - thus far, I've thought wrong:

Although the whole world seems to be short the dollar, it's not acting too well, given the deflationary carnage around us right now. (Source: StockCharts.com)

As Marc Faber said a few weeks back - we're going to find out if Mr. Bernanke is a true money printer, or just an amateur money printer.

Finally your parting moment of zen - the gold chart.  It's rising for all the right reasons, I know...fiat currencies are getting flushed down their respective sovereign toilets, there is a madman running the Federal Reserve, etc.  Still - the parabolic move on this chart is a tough one to buy into:

Gold gets parabolic. (Source: StockCharts.com)

The short term is setup for some potentially gnarly action.  The only thing I can think to do is to remain focused on our longer term strategies:

• Hold a lot of cash (for buying opps),
• Some gold (which though scary now, should trend higher over time until the sovereign debt crises are resolved and currencies get some respect again)
• Invest in agriculture (because people aren't going to stop eating, and the world has some serious supply problems)
• Diversify yourself internationally (in case your government gets a little too crazy)
• Reduce or eliminate your dependence on a W2 (with 20+% unemployment, and climbing, it's becoming increasingly risky to rely on a salary as your sole source of income)

This piece was originally published on our sister site, The Contrary Investing Report.