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Don’t Believe the Fed – Here’s How to Play the Markets Instead

October 11, 2023  |  Steven Place
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The market’s reaction to the Federal Reserve’s latest meeting has brought risk to the forefront yet again. 

Here’s my hot take: 

The current narrative does not matter as to whether you’re going to be profitable in the markets or not. 

If you’ve been hiding under an economic rock for the past 18 months, let me bring you up to speed first… 

The basic idea is this: the Federal Reserve has embarked upon the fastest rate hike regime in the history of modern finance, and there are many second-order effects that have been taking place since then.

And it looks like it’s about to accelerate.

If the Federal Reserve sets the discount window at 5 and a quarter percent, that is putting mortgage rates above seven and a half percent. Business lending costs go higher, general cost of capital goes higher, and all of a sudden you’re staring down the barrel of a recession if the Fed keeps rates high for too long.

The Goldilocks case is that we will see a soft landing in the economy and that the Fed will be able to back off of its financial tightening without breaking the system. Of course, that rarely is true. 

The hubris of central banks is that they tend to be behind the curve and not adapt to current market conditions.

A great example was 2021. 

The Fed kept talking about “transitory” inflation. Shocker, they were wrong.

That led to a harsh spike in input costs. Energy products spiked, and the risk markets were no longer seeing the kind of fun upside that we saw in early 2021.

And then every central bank across the globe woke up and started cranking rates higher.

So far, there’s been a pretty tame reaction economically. Commodities pulled back, jobs numbers look fine, but overall inflation numbers keep being sticky.

We did have this nasty move in the regional banks because they were holding too much duration risk.

In other words, these banks are holding the bag on a bunch of treasuries and mortgage-backed securities. 

That’s how they took out Silicon Valley Bank and First Republic Bank. These also happen to be major players in the tech ecosystem, the effects of which we haven’t seen play out yet.

These debt securities technically produce returns as long as you’re not leveraged; it’s not a huge deal. But the issue is many of these institutions are holding these debt instruments where, if you were to Value them on a mark-to-market basis, they would be in 40 to 50% drawdowns.

And this isn’t just in US treasuries; you also have corporate debt, you have Emerging Market debt, you have other sovereign debt that are in deep drawdowns relative to where they were priced 18 months ago. 

And so it feels that we’re just in this weird, quiet place in the market where everyone is holding their breath to see if the whole thing is about to collapse like a house of cards, and that it doesn’t matter what the Federal Reserve does next because the damage has already been done with the rate hikes.

And when you combine that with the resumption of student loans, which is going to end up being a version of quantitative tightening…

And you have a drastic increase in property taxes due to values being reassessed, all of a sudden you have these market dynamics that create a lot of instability, and to be quite honest, it could get very ugly within the next year.

Don’t Believe the Fed – Do This Instead

All right, now that you’re looking for the financial apocalypse just around the corner, let me talk you back off of the ledge. 

I didn’t start trading full-time until 2009, but I was very aware of what the markets were doing leading up to the great financial crisis.

First off, I remember when crude oil hit triple digits, because right after Hurricane Katrina I was driving on the interstate, shocked to see gas prices at $2.75 a gallon.

I also saw a lot of people who were not qualified to become Real Estate Investors speculating in the Orlando markets, and it felt like a bubble, and it turned out to be a bubble… but this was in 2006.

The housing market bubble was exceptionally obvious starting in 2006, but the market did not really start rolling over for another 18 months. We had a very similar kind of event where Lehman went bankrupt, but we didn’t see a credit crisis for another nine months down the road.

Now I want to fast forward past the great financial crisis to somewhere around 2011, and this was a point when we had a fiscal cliff risk, and the market took a really hard hit, and there was a ton of just generally nasty news coming out.

You had European debt markets that were falling off of a cliff; we had an acronym called PIIGS for Portugal, Ireland, Italy, Greece, and Spain; all of that debt would eventually be monetized by the ECB. 

You also had escalating geopolitical tensions due to the Arab Spring, so with all of that noise in the background, a lot of people got beared up and were looking for the second push to the downside to try and retest the 2009 lows, but that never happened.

And if you had been permanently bearish all through the 2010s, you missed out on one of the best Equity markets in the history of Finance.

So I say all that to say this: timing matters

If you’re going to try and make it in this market, then you cannot base your financial decisions off of the whims of whatever the headline of the day is.

You need a solid trading framework that allows you to profit on both the short and the long side.

You need a method of structuring your trade so you maximize the rewards relative to the risk that you take in each trade, and finally, you need to understand that your opinion on the market simply does not matter.

Price movement occurs when institutional flow overwhelms one side of the trade, and we get a strong move in either direction. 

We have a trading roadmap that allows you to identify this institutional order flow, and I can tell you right now at the time of this video we are starting to see signs in that roadmap that suggest a bounce, not necessarily the bottom, but we are at a point in which the reward to the upside relative to the risk to the downside is allowing some solid trading opportunities.

So while everyone else is frozen in fear from reading all of the headlines in financial media about how the Fed is going to break everything, we are basing our decisions off of the internal structure of the market and what the motivations of institutions are right now.

If you’d like to get an immediate edge in your investing, if you’re tired of chasing the headline of the day, then I encourage you to click right here to view a free training video that will show you exactly how we use our trading roadmap to identify key turning points and profitable trading opportunities in the market. 

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Steven Place
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