U.S. stocks are hitting record highs today. Though as recently as late January, things didn’t look quite as rosy…
The coronavirus scare knocked stock prices down into the January 31 close, putting many investors on edge to start the year.
I watched the pullback cautiously. But as I told my 10X Profits readers at the time, I was pretty sure that that near-term driver of stock prices wouldn’t be near enough to overcome the long-term and far more powerful driver of stock prices: the so-called “Fed put.”
Coincidentally, during that late-January pullback I had the pleasure of hearing David Kotok speak at the Inside ETFs conference here in Miami.
The Fed’s Independence Is Under Threat
Mr. Kotok is the founding Chief Investment Officer of Cumberland Advisors, a registered investment advisory firm that manages more than $3 billion in client assets.
He’s also a genius when it comes to discerning the most important drivers of major global market trends — particularly in fixed-income markets, where the interplay between economic growth, inflation trends and monetary policy tend to make for a particularly complex puzzle.
Even if you don’t know the bond markets like David does (I sure don’t), you probably won’t find it surprising that the Federal Reserve’s unprecedented actions since the Great Financial Crisis of 2008 continues to be a major talking point even among Wall Street’s most successful strategists and money managers.
In fact, when David was asked by his interviewer if he had ever seen the independence of the Federal Reserve threatened as strongly as it is being today, the most poignant part of his answer was saying, “The Fed has never been bullied in the way it is today.”
Bullied. That’s how he characterized it.
He moderated his take on the situation by sharing how Federal Reserve has indeed been “pressured” by various players, for short episodes, ever since its inception. And that it’s easy for a president to blame the Fed when something bad happens in the economy or markets, as many presidents before Trump have done.
But he specifically expressed his convicted view that this is different… that the Fed’s independence is truly under threat by the continual barrage of Twitter “bullying” it receives from @TheRealDonaldTrump.
This whole conversation made me think back to a conversation I had with my 10X Profits readers in January 2019… the piece I wrote this time last year, which for fun I titled “The Bullied Powell Put.”
Is This the “Powell Put?”
Frankly, I’m pretty shocked that the Fed has reversed course so quickly.
In early October , they were full steam ahead with their plan to raise rates a number of times in 2019.
In December , they lowered their estimate of planned 2019 hikes from three to two.
That wasn’t enough to satisfy the bulls.
So now, it’s no hikes?!
Whether or not it’s true, it certainly appears that Powell & Company have been bullied into a premature ending of their previously disciplined tightening cycle.
Maybe they felt the pressure of falling stock prices.
Maybe they caved to President Trump’s Twitter “urgings” (to put it nicely).
Maybe they aren’t caving at all – maybe they’re doing the right thing.
But in a world where perception is reality, the Fed’s independence is now in question and the “Powell Put” is back on the table.
You don’t want to fight the Fed.
So if Powell is in fact more than happy to accommodate the needy wishes of bullish investors, playing contrarian could be a “correct, but costly” position.
I told my 10X Profits readers last January how “you don’t want to fight the Fed.”
Well, I also heard from Vanguard’s Senior Fixed-Income Strategist, Anne Mathias, at the Inside ETFs conference, and said it even stronger: “Don’t ever, ever, ever fight the Fed.”
All told, we don’t know when the Fed’s accommodative stance will end. But for now, consensus among the smartest in the room seems to be that the Fed — and all central banks around the world — continues to implement policies that should, for now, continue to push asset prices higher.
That means the “risk-on” trade is still alive!
And for my 10X Profits readers who have now been in my model’s risk-on trade since last January for 80%-plus profits and growing… not fighting the Fed has been a great way to milk handsome profits from the all-powerful “Bullied Powell Put.”