Every bond and stock investor knows at least one Wall Street saying regarding Fed policy moves. Some of them are: “Never fight the Fed,” “Follow the Fed,” and “Don’t fade the Fed.”
They’re good advice, but only to a point.
That point is usually where the Fed is wrong and has to turn tail, which will happen again, this time maybe sooner than later.
So, in today’s Total Wealth, I’m addressing just what Fed officials are saying and what you should be listening to instead, but only if you want to make money in the market.
Old days vs. New Ways.
I long for some of the “old days,” like when the Chairman of the Fed was sphinxlike. When the Chairman said nothing about what the Fed was doing (or going to do, specifically) and only spoke in general terms about what the Fed’s job was and that they were doing their job.
Cryptic, I know, but a whole lot better than listening to the Fed Chairman address economic clubs and every Fed regional president clamor for TV time, like starlets hoping to land a big movie role, or a plum job on Wall Street, or the next Treasury Secretary.
You know who I’m talking about. It’s annoying.
And it’s disruptive. Investors have to parse what the Fed has to say to figure out what policy moves they’ll ultimately decide on and act on. And then they’re out in public addressing what they should be doing next because they don’t all agree. They can’t even get all their ducks in a row.
They call it “transparency,” but it’s really a lot of white noise.
Then there’s the fact ( because it is a fact) that the Fed’s almost always wrong. Their collective prognostications are famously off the mark, and their policy prescriptions are the reason we have extraordinary boom and bust cycles.
The Fed’s artificial manipulation of interest rates too low for too long caused the subprime to build up and meltdown. Their further manipulation of rates even lower for even longer to fix their last screw up, bloated their balance sheet to $9 trillion, and levered up the greatest bull market in history.
Now they’re trying to fix the inflation bubble they never saw coming but engineered by keeping rates too low for too long, again.
Frighteningly, they’re going to get the new fix their planning, raising rates faster than markets can handle, terribly wrong, and tank both the bond and stock markets.
Listen to the Market Instead
Okay, so now we think we know what the Fed’s doing because we’ve heard them say inflation is out of control – because you know, they all have to sound like they’re inflation fighters because of the Fed’s number one mandate being “price stability. ” T hey want us to know they’re on it. And by on it they mean they’re going to raise rates to kill the bugaboo.
As if a few fat hikes in the fed funds rate will kill inflation caused by a pandemic, supply chain issues, China locking down manufacturing cities, Russia invading Ukraine, or geopolitics beyond their control.
No, they’re not going to kill inflation just because they say they’re raising rates to do just that. Don’t listen to them.
Listen to the markets instead. They’re telling us what’s happening with the Fed’s plan to raise rates quickly. They’re tanking.
And they’re going to continue to be volatile, with bounces on short covering and hopes rate hikes will moderate, and drops on fears inflation is already too embedded to fix quickly or that the Fed will overshoot and tank the economy.
One thing’s for sure, the Fed’s wrong, again. So, stop listening to them and follow the markets. Because they will hike too much and hammer the stock and credit markets.
And that’s your chance to make a bundle.
Because as sure as the Fed’s wrong, they’ll have to reverse course on their tightening policy plans, just like they did in 2019 when the stock market tanked the last time they tried tightening and hinted they’d start quantitative tightening. And when they do, markets will rally big-time like they did in 2019.
So, take advantage of the downdraft here. Start accumulating positions in great companies with great balance sheets and great products and services. Because they’re going to rebound first when the Fed turns tail and can’t afford to see markets hit the canvas and bring down consumers and the economy with them.
Cheers,
— Shah
Source: Total Wealth