The Fed is forced to pay you to stay safe

As the Fed fights the last war (on inflation) the result is a rare thing; a bear market haven called cash, paying increasing income

Source: VistaCreate Pro

Safety Vehicles

Gold: For long-term financial security. Real gold, not ETFs, not allocated gold trusts that you can never actually possess (if you, like me, are not spectacularly wealthy) and certainly not gold mining equities.* Just gold. It’s so simple as to be overlooked by all too many, probably because it pays no income and just sits there over decades holding value.

Cash: Unlike other bear markets in equities over the last few decades when the Fed throttled savers with the likes of Zero Interest Rate Policy (ZIRP) at the first signs of trouble for asset owners, today’s Fed is commanded to clean up the mess it was primary in making during the last asset market bailout (H1, 2020), in a battle against inflation’s lagging indicators (e.g. CPI) and headlines (picture the public manning its pitchforks and torches) as cash pays increasingly higher income.

Picture a Quixote-like Fed tilting at windmills like still alarming (but backward looking) YoY CPI comps.

Source: Wikipedia

The real story is being told by the same indicators that gave us early warning in Q1, 2020 that the Fed was about to unleash the mother of all inflationary operations. Back then forward looking items like Austrian ‘True Money Supply’ (TMS) and the Silver/Gold ratio (SGR) ramped impulsively. Today TMS, SGR and other indicators of abundant liquidity are either trending down or downright crashing.

As for cash, like gold, it’s so simple that scores of equity and bond holders (shaking hands being held by their mainstream ‘60% stocks, 40% bonds’ financial advisers) have still not gotten the memo of said simplicity. I have to believe that is because the herds (including their advisers) have been trained that way over decades of excess; trained to be in essence all in at all times because after all, the market always comes back (eh?). Sure the public is fearful now, but they have not upchucked their equity holdings yet to the degree that ends bear markets.

Did I mention that cash is paying increasing income? A no-lose bet and as we’ve been noting in NFTRH for most of 2022, a great waiting place. After all, everyone is just…

Waiting for the fish to bite
or waiting for wind to fly a kite
or waiting around for Friday night

or waiting, perhaps, for their Uncle Jake
or a pot to boil, or a Better Break
or a string of pearls, or a pair of pants
or a wig with curls, or Another Chance.

Everyone is just waiting. -Dr. Seuss

Well, a not necessarily better break is coming, although it has yet to be proven that our favored outcome, deflationary, will win out. The other side of the coin is a complete outlier, the von Misesian Crack-up-Boom. Let’s just say that as of now the Fed is trying its hardest to avoid the latter, while wooing the former.

* Gold stocks are pure speculation and when the time is right they will make speculators’ heads spin in bullish wonderment (about how such a reviled asset class can move so strongly) as they leverage gold’s future positive standing within the macro. The correct backdrop for the miners will be counter-cyclical and likely, deflationary.

Risk Management

Day traders watch tiny chart twitches on computer screens with eyes wide open and mouths agape. A thrill a minute.

The public – insofar as it invests – sleeps soundly knowing that it pays a financial adviser to do the worrying.

I suppose that really committed day traders can play this market well enough. But to me, that’s no way to live.

As for the sleepy public, they receive their monthly and/or quarterly statements with what must be a sinking feeling before even opening the envelope. Yet many have been trained by decades of central bank bailout operations to just hang in there. Maybe hanging in there will work out once again, as there are some contrarian plays developing that I would like to see happen with the election cycle, technical support and sentiment all married up in a low risk proposition.

But risk management is not allowing some financial professional who’s been bred under the ‘60% stocks, 40% bonds’ axiom to do the worrying. If you’ve been in those asset classes per standard recommendation you’ve gotten 100% hammered.

Even when it is not paying income under disgusting Fed policy like ZIRP, cash is often a valuable position. The first rule of investing – at least my first rule under the time frames I use – is do not lose money. Be liquid and be ready for the macro swing, just as NFTRH was ready for the last one (which swung from deflationary bearish to inflationary bullish in 2020). This one will swing from inflation hysteria to disinflation (at best) or deflation, or less favored but viable, intensifying inflation that the Fed cannot get a handle on.

NFTRH manages not the long-term and not so much the short-term. Our short-term management involves taking indicator checkups, watching and staying with trends, and not getting caught up in immaterial noise and emotion as trends play out.

What we absolutely must get right, however, are the macro swings that come along every couple or few years. Not personally being an accomplished market short seller, I’ve shorted a bit here and there in 2022, but do not have the right mindset for being an active or committed bear, especially when cash is… Bueller? Yes, paying increasing income.

This pre-pivot phase (talking a macro pivot, not necessarily a near-term Fed policy pivot) of one-way Fed hawk hysteria is actually pretty boring for me during the trading week. It’s a waiting place, and a no-lose one at that.

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4 thoughts on “The Fed is forced to pay you to stay safe

  1. Great piece, Gary. Cash had been great. i bonds, great. T bills, great. Gold, yeah it’s real and can’t go poof, but super frustrating waiting. For those of us subs who see your trades, I just kind of chuckle at many attempts that go south. One day, right?

    1. I sometimes can hear the laughter or see the wincing eyeballs reading the TL page. But I’ll keep poke poke poking until the real turn comes.

    1. Amazing, Bart. Notice the 30yr spiking as well and looks like a blow off. An amazing scenario would be that if all inflation indicators make a final and spectacular blow off.

      30yr is through my 4% target on a monthly candle. What if… what if just maybe we get an in-month spike and reversal? Or maybe in November after FOMC. Or maybe never as we go full crack-up.

      I am just glad to have a front row seat watching this play out. #patience

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