Until they don't...
There are so many issues brewing under the surface of the markets. Only a select few people are acknowledging them though, none of which are members of the Fed, central banks or the government. You know, the people who determine our monetary and fiscal policy. Why would they have their fingers on the pulse, right?
Six months ago we wrote this blog about how the Fed was going to destroy the U.S. economy. Today we revisit the ideas behind that blog and break down what we are seeing today and how we are planning for the future.
The Fed
The Fed announced that they will begin to taper purchases this month. Sounds like they finally realized that printing billions of dollars each month was leading to wealth inequality and inflation, right? Wrong!
They were printing $120 billion each month (purchasing $80 billion in treasuries and $40 billion in mortgage backed securities). Now, they are going only going to print $105 billion each month. So they are still adding to their balance sheet and propping up the market. Furthering the wealth gap. Causing our dollars to lose even more value.
The strategy makes zero sense. Until you realize that the Fed is only trying to make sure markets function "smoothly." Aka markets only go up so they can pretend the economy and the market are one in the same while the rich get richer.
The Fed also refuses to hike interest rates. So not only do you have printing of money every month, but low interest rates result in expansion of the risk curve for investors, or should we say speculators.
This is known as TINA - there is no alternative. If money sitting in a savings account is losing value, if owning bonds is actually negative yielding, why wouldn't I put my money in the stock market? Now I have money in the stock market, everything is constantly going up, why not put that money in more risky assets with higher returns. Everyone is making money hand over fist and there have been no repercussions, so why not?
That's what we are seeing. And as the bubble gets bigger, the Fed has no choice but to keep printing and keep rates low. Otherwise, the bubble pops and the economy goes into the shitter. But the longer they keep up this game, the worse the crash will be.
Inflation
Due to the Fed's policy and printing of 40% of all U.S. dollars in existence in the past year, inflation was up 6.2% year over year, the highest in 30 years. And that's with the modified CPI valuation. If you were to use the previous CPI measurement, inflation is up over 14%.
Inflation hurts the poor and benefits the rich. The poor have to pay more for goods and services and can't afford to buy assets. The rich already own the assets, so the inflation causes their assets to go further up in price.
The Fed is actively widening the wealth gap with its policy. And as long as they keep printing money, inflation will only get worse. It is not transitory. We just better hope they get in under control before hyperinflation begins. I'm not so sure they will, especially after their slow actions recently.
Bond Markets
Bond markets are showing signs of stress. For those unaware, bond market moves tend to precede moves in the equity markets.
We are seeing a ton of volatility in the bond markets. Here is the bond volatility index since 2018. The large spike was from the 2020 pandemic. You can see this year we are making higher highs and the volatility continues to increase.
Below is the bond volatility index overlaid on the SPX chart going back to 2018. Spikes in the bond volatility index have preceded pullbacks in the market.
Now does this necessarily mean we will see a pullback? Past performance is no guarantee of future results but with all the underlying red lights flashing in the market, we believe it does. Can we time it though? No.
Hedging
How are we hedging against all of these issues brewing under the surface? Simple - Bitcoin and Gold.
What? Gold?! Get out of here boomer!
First, we are millennials in our early 30s. Second - we know! We know! Gold has been dead money for over a decade. It's ancient. Bitcoin is so much better. We get it and we agree completely. We are huge fans of Bitcoin. In fact, Bitcoin makes up 11% of our entire portfolio. Bitcoin is our ultimate hedge against the fall of the dollar in our opinion.
If you've followed us for any amount of time, you know that we are big proponents of Bitcoin. We think it solves the manipulation aspect of fiat money and think it can solve many of the issues around us. But we see an opportunity with Gold. The charts look good and we see upside on top of being a hedge for the warning signs in the market.
Gold has been around for thousands of years. Dead money for a decade is nothing when thinking about it in terms of thousands of years.
Full disclosure, we have not held or owned gold since we started investing 14 years ago. So for us to even look at gold should say something. We think so at least.
If you read our November newsletter, you'll know that last month we opened a position in Gold. We went over the charts and detailed exactly why we opened the position. Pretty good read in our opinion. If you haven't subscribed, you can sign up here.
For a quick summary, we purchased $GLD, the Spider Gold Trust, and $GDX, the VanEck Gold Miners ETF. This position makes up approximately 0.50% of our entire portfolio. Not huge, but enough if something were to happen.
Conclusion
The Fed is not doing its job right now. They are moving too slow with regards to inflation. They continue to print billions of dollars, adding to the inflation woes. They continue to keep rates low, causing bubbles to get bigger every day. And they continue to further the wealth gap.
PS - Bitcoin fixes this.
We have said it and will continue to say it. We can't time a market crash. We can only hope for the best and prepare for the worst. That's why we stay fully invested and have hedges in place.
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Partnerships
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Disclosures
I am not a licensed financial advisor or financial professional. This is not investing advice. I am simply sharing my research and opinion based on that research. It is very important that you do your own research and make investments based on your own personal circumstances, preferences, goals and risk tolerance.
This blog contains some affiliate links. If you purchase any service through one of these links, I may earn a small commission at no extra cost to you.