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Michael Gayed: Why the Fed Is $crewed

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By the time you see the hard bend in the road, it's too late to hit the brakes.

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Thinking is the hardest work there is, which is probably the reason why so few engage in it.
-Henry Ford

I highly recommend you read Charlie Bilello's latest piece on PensionPartners.com.

His message is wildly important for traders, investors, and asset allocators, and should the myopic thinking which is pervasive in the business of investment management.

Last week was both typical and atypical. 

It is a well-documented fact that historically, stocks tend to gain the day before, during, and after Federal Reserve policy announcements.
Indeed, equities followed their historical script, rallying strongly at the same time the VIX was smashed.  As we all know, there was nothing new.  The Fed remains in zero interest rate policy mode, and hopes to raise rates this year. 

I long for the day when the media will stop obsessing over when the Fed will raise rates, and turn its attention to the fact that the Fed has been repeatedly wrong in its outlooks, lulling investors into enormous complacency.

There is a major problem for the Fed in the near-term, and the Fed faithful. Wage inflation pressure appears to be slowing, given last Friday's data. 

This, combined with one of the worst months for commodities in some time, is pushing inflation expectations lower and causing a widening of credit spreads.

Long duration Treasuries are rallying to the same extent as the S&P 500 as market breadth continue to look very weak and emerging market stocks are in free-fall.  These are not the kinds of conditions that the Federal Reserve raises rates into.  These are the kinds of conditions that result in market volatility, corrections - with the central bank scrambling afterwards.

Our indicators, which are proven as lead indicators of volatility, continue to suggest that a difficult period is ahead for cyclical sectors.
This implies that from an asset allocation perspective, Treasuries and dividend-heavy sectors could strongly outperform.  In the small sample of the last two to three years , when equities had no downside (with the benefit of hindsight), these indicators resulted in false positives. 

In other words, every time warning signs showed, equities ignored them. 

This time around,  there are a number of warning signs appearing at once, independent of our intermarket signals used in our mutual funds and separate accounts. 

In the US, we don't have QE as an excuse to ignore the red lights flashing ahead of us.
We suspect that an environment more like 2011-2012 is at our door step. 

That does not suggest the bull market is over. But rather, the behavior will change. 

Those were strong times for our approach to managing downside risk, and stressful times for the Federal Reserve. 

One thing is for certain: the Fed is going to have a tough time if financial conditions continue to deteriorate at the rate they have. 
The headline averages may not be paying attention now. 

But often, by the time you see the hard bend in the road, it's too late to hit the brakes. 

Magnitude of loss potential vs. frequency of gains history -- the battle has begun. 

Your Realistic Investment Strategist,

Michael A. Gayed, CFA
www.pensionpartners.com

Twitter: @pensionpartners

This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.
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No positions in stocks mentioned.

This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

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