Hi Do, Here are Todd’s latest fun picks to take your financial skills to the next level... Are you ready for the next phase of epochal change?
The investment masses are foolishly hoping for the Fed to pivot.
You can see it in market dynamics. The worse the news is, the more the market rallies (while good economic news is met with market declines).
The expectation is that bad economic news will force the Fed to return to loose money policies ushering us back to the glory days of "buy the dip" and "passive investment profits."
But be careful what you wish for...
I've stated all along, and will repeat again for clarity - the Fed will remain restrictive until the first of two situations occur: - Inflation is tamed
- Or something critical in the financial plumbing breaks that risks systemic failure.
Until one of those two things happens, the Fed will pursue restrictive policy because Jay Powell absolutely doesn't want to be the next Arthur Burns (the historically maligned Fed chair who repeatedly failed to beat inflation by succumbing to political pressure).
Since we're nowhere close to taming inflation right now, any reasonably foreseeable pivot in Fed policy is problematic because it will be in response to systemic failure risk.
Worse yet, systemic risk is growing as evidenced by a wide variety of financial stress indicators exceeding severe thresholds and Bank of England's recent fiasco with pension funds (see the resource below).
A Fed pivot right now won't solve the underlying economic problems of this new epoch, and we won't return to the prior decade's investment environment (despite what most investors think.)
Instead, a Fed pivot now merely exchanges one serious problem for a different serious problem. It's not a solution: it's an act of desperation.
Again, that's because the epoch changed. The rules are different now. I've been sharing educational resources for the past year helping you understand this fact and how to adapt your investment strategy to fit this new epoch.
Sure, the markets will predictably respond to a Fed pivot with a short-term, rip-roaring rally. That's fully expected.
But the much deeper problem is how the Fed is caught between a rock and a hard place with no solution. On the one hand, inflation remains excessive and uncontrolled requiring renewed tight monetary policy. On the other hand, systemic failure risk forces loose monetary policy to prop things up, which then exacerbates the already out-of-control inflation.
After the markets initially rally in response to the news of an untimely pivot, sobriety will eventually settle in resulting in a painful hangover.
The markets will realize the gravity of epochal change I've been teaching you about for the past year. That's because a wide-ranging set of problems will remain that not only aren't solved by permissive Fed policy, but are exacerbated by it: - Inflation will persist, and the problem will get worse under permissive policy
- De-globalization and consequent onshoring of key manufacturing and supply chains will further drive inflation
- Tight labor markets will convert temporary inflation to endemic inflation
- Massive underinvestment in fossil fuel production resulting in supply constraints will light a fire under inflation once permissive monetary policy increases demand again
This is just a short list to drive home the point that permissive Fed policy only worked when the economic backdrop was disinflationary.
But that epoch changed,
Decades of artificially low interest rates by central banks around the world embedded structural instability that most likely will break causing systemic failure before the Fed can do what it needs to get inflation under control.
The U.K. pension crisis resulting in the Bank of England pivot over the past two weeks is the first visible symptom of that underlying structural instability manifesting as a crisis. Rest assured, there are many more problems like that lurking just under the surface of the apparent stability you're seeing in the markets right now. MANY MORE.
The two most likely symptoms to watch for impending breakage are the dollar and/or the credit markets. You don't want to see the dollar climbing asymptotically higher or credit spreads materially widening. Both are signs of increasing stress in a period where stress is already hitting a breaking point.
And yes, if it happens, then it will likely force the Fed to pivot as they make an impossible choice between two very bad situations.
But that pivot won't be a good thing when measured in years (even if the markets welcome it with a big rally measured in days or weeks).
It'll be like giving a final shot of heroin to a sick addict. He'll feel better in the short-term, but the withdrawal symptoms risk fatality.
I fully suspect that the aftermath of that next Fed pivot is when the investing public will catch-up to what I've been teaching you for the past year.
The investment epoch changed. Even a Fed bailout with easy money won't solve it. A different investment strategy is required to intelligently manage risk and reward. I hope today's resources helps you make a smart investment decision... Bank of America's researchers are finally figuring out what I've been telling you for the past year - we've entered a new economic regime. Better late than never, I suppose. Paraphrasing their conclusion, "The previous decades of low inflation and low interest rates were the historical aberration. Further, "...after a developed economy’s annual inflation tops the 5% threshold, it takes an average of 10 years to return to 2% historically." You heard it here first, and this is how you solve the investment return problem caused by this new economic regime. Bridgewater is one of the largest hedge funds in the industry. Quoting from their research, "The thing we feel most confident about is this: today is about as bad an environment for financial assets as we have seen. We don’t see stocks as pricing in the economic pain that we and Chair Powell think it will take to bring inflation down." I agree. The markets have been remarkably sanguine, and I think it's because they're foolishly waiting for the Fed pivot as explained above. Watch out when the markets wake up to realize the Fed is the cause, not the solution, to our current problems. I've shared extensive research during the past few months proving the most effective investment strategy to reliably manage risk and produce profits in this environment. Don't make the mistake of fighting the last war with antiquated investment strategy. This is an accessible synopsis explaining the causes behind the U.K. pension drama. In a nutshell, U.K. pension funds stupidly bet the farm on financial models/derivatives that assumed interest rate volatility would not exceed 30 year historical thresholds. Dumb, dumb, and dumber. I warned back in 2013 about the "leveraged" downside volatility inherent in the bond market with artificially low interest rates. I also taught my subscribers over the past two years how to not get burned by historical bond data bias in this tactical asset allocation investment education series. Yeah, this issue was ABSOLUTELY KNOWABLE in advance, yet the world economy now faces systemic risk with trillions in pension funds on the brink of collapse. Dohhhhh! Fortunately, you know better because of reading this newsletter and implementing my recommended investment solution to protect your assets in this new economic regime.
Onward and upward!
Todd Tresidder
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