The Fed's Role in Shaping Global Markets
The Investment Strategy Wall Street Hate
I don't know if I'm wrong too often, but when someone doesn't know much about financial markets, they tend to think that experts know extensively about everything and can even calculate how a specific event will affect the markets.
Then, the already initiated person shifts to the opposite side of their belief and comes to the conclusion that no one has, or can have, any idea about anything. The truth is more complex.
In general, of course, it is true that no one has any idea about anything most of the time. That darkness and ignorance are maximal especially when it comes to the future. It is certainly so. But it is not the job of an analyst to figure out the future as if they were an astrologer but to realize when probabilities are more skewed one way than the other.
Yes, no one knows anything most of the time, but sometimes, at certain moments, probabilities stack up on one side or the other. That is what really matters.
The stock market is a game that is 80% emotional and 20% strategy. Following a good system is often much more important than trying to predict the future. This system must be backed by price in 99% of cases. It makes no sense to buy something good at a high price; it makes sense to buy something good at a good price, and that is what we try to do.
Just a few weeks ago, we warned that PUT and CALL stock contracts, which serve as a shield against extraordinary market downturns, were at lows not seen in a long time.
One of the main factors that impact these factors is the PUT and CALL ratios. Essentially, they indicate whether the world's major funds are protecting themselves against a major downturn or not.
As shown in the graph below, we have gone from yearly lows to highs in a very short time. This can only be achieved by benefiting from buying assets at a good price.
Not to mention, our contracts have appreciated by over 50% in just a few days simply by buying cheap and waiting.
Now, imagine the impact this could have if we reach the extremes we saw during the Covid, not only in terms of PUT/CALL ratio but also in terms of market declines and increased volatility... We are talking about appreciations of x50-x100 in just a few days.
The Question of the Year
How can all this volatility occur right after such remarkably good employment data?
We warned about this a long time ago, the market needs liquidity and interest rate cuts, which only come from poor data that triggers a recession. Otherwise, central banks will have no excuse to implement expansionary economic policies. We already mentioned that these rate cuts would return to the markets as soon as employment declines were reported. So far, that hasn't happened.
The market has understood the opposite, believing that rate cuts will take longer to arrive. Look at how far we've come. The market has more faith in the Fed than in good macroeconomic conditions.
Analyzing Some Trends Makes No Sense
The Fed (and some central banks) control the world, whether you like it or not. All the power is in a few hands, and there are things we can do to take advantage of it.
Perhaps the most important thing is to take advantage of the liquidity cycle. A cycle that will gradually rise (as the Fed lowers rates) and benefit high-risk assets.
The clear high-risk asset that has been affected is cryptocurrencies and technology stocks. In November 2021, we warned that we would see declines, and since then, we have witnessed a crypto winter, where the prices of many of these assets have fallen by around 80%.
Just in November a year later, 2022, we warned that the minimum had been reached, and it was time to buy again at $16k in the case of Bitcoin.
Many investors realize that the market is not rational as time goes on. Good news can lead to market declines, and bad news can lead to rises. Therefore, we have to be aware of who is directing the economy and have a plan for each scenario.
Another issue we need to address is that each individual's system must have a shield against unprecedented crashes. Perhaps, next week, I'll tell you the question that a very close person asked me, which could change the future of the economy.
Now, as every Sunday, our portfolio.