Watch the Fed Closely for Signposts to Profit

[Inside Wall Street with Nomi Prins]( Welcome to Inside Wall Street with Nomi Prins! It’s the only daily newsletter featuring the insights of Nomi Prins and her team of global experts, including regular contributing editors Eoin Treacy and Laurynas Vegys. You’ll find all our issues [here](. And if you have questions or comments, shoot us a note anytime [here]( or at feedback@rogueeconomics.com. Maria’s Note: Maria Bonaventura here, Rogue Economics’ senior managing editor. Today, we hand the reins over to one of Nomi’s regular contributing editors, Eoin Treacy. Eoin is a career analyst, writer, strategist, commentator, and lecturer. He’s known around the world for his knowledge of asset classes, sectors, and thematic investing. Today, Eoin reads between the lines of the Federal Reserve’s last policy meeting… and shows us how we can get one step ahead of the Fed. --------------------------------------------------------------- Watch the Fed Closely for Signposts to Profit By Eoin Treacy, Contributing Editor, Inside Wall Street with Nomi Prins Capital is both global and mobile. It flows to the most attractive assets in the world. Money flows are part of a tapestry of events that create the markets we seek to profit from. That’s why we spend so much time monitoring money flows around the world. They form the basis for[the new normal Nomi has been writing to you about]( where the abundant money created by central banks – also called liquidity – is driving markets higher. It’s a symptom of the growing disconnect Nomi has identified between the markets and the real economy. And as she told us last week, that[liquidity is here to stay](. Now, there’s a lot of talk about America’s central bank, the Federal Reserve, raising interest rates and cutting back on its money-creation. Many investors fear this could spell doom for stocks. Today, I’ll show you why those fears are misplaced, along with the best step investors can take today. But first, you should understand the Fed’s central role in the markets’ ups and downs… Recommended Link [Crypto: Where Fortunes Can Be Made Overnight?]( [image]( Cryptocurrency... It’s where “fortunes can be made overnight.” We’ve seen small cryptocurrencies soar as high as: 122%... 487%... 1,606%... 2,175%... and 4,181%... But according to Teeka Tiwari, the man voted the #1 Most Trusted Crypto Expert... [April 1st could be your LAST CHANCE to capture the biggest potential crypto profits.]( If you own crypto today or are planning to buy in the near future... [Watch this video now.]( -- How the Federal Reserve Regulates the Economy Last week, the Federal Reserve released the minutes of its December meeting. One big announcement – buried on page 4 – grabbed my attention. It gets to the heart of the question whether global liquidity is expanding or contracting: Participants had an initial discussion about the appropriate conditions and timing for starting balance sheet runoff relative to raising the federal funds rate from the [effective lower bound] ELB. They also discussed how this relative timing might differ from the previous experience, in which balance sheet runoff commenced almost two years after policy rate liftoff when the normalization of the federal funds rate was judged to be well under way. Almost all participants agreed that it would likely be appropriate to initiate balance sheet runoff at some point after the first increase in the target range for the federal funds rate. Let me unpack that Fed-speak a bit… I’m sure you’ve heard the term quantitative easing (QE). This is when the Federal Reserve substantially expands its balance sheet by buying Treasury bonds and adding them to it. It does this to support asset prices and the economy. And when the economy is strong enough again, it “tapers” its bond purchases. A balance sheet runoff is the opposite of quantitative easing. The Fed reduces its balance sheet. Often, it does this by selling bonds. But with a “runoff,” it simply deletes bonds from its balance sheet as they expire. This reduces its total assets at a predictable pace (bonds have set expiry dates). This is referred to as quantitative tightening (QT). The Fed does this when it is worried about the economy overheating and inflation – as it is right now. So it’s no surprise to see talk of a balance sheet runoff. [Featured: New Financial Technology Disaster for Wall Street]( What Happened the Last Time the Fed Tightened? The last time the Fed engaged in quantitative tightening was at the end of 2017. 2017 was one of the least volatile years for stock market returns in history. Stocks had been rallying for eight years. And in 2017, the market had responded very positively to the Trump tax cuts. The S&P 500 ended the year up 21.8%. The Fed was worried about the market overheating. So between the end of 2017 and the end of 2018, it reduced the size of its balance sheet by more than 8%. The three main effects of this quantitative tightening program in 2018 were higher Treasury bond yields, a strong U.S. dollar, and a more volatile stock market. Five-year Treasury yields increased by 0.75% in 2018. The U.S. Dollar Index traded up from a low of 88 to a peak of 97. And the Volatility Index (VIX) – a measure of volatility in the market – spiked from about 10 to 30 on two occasions. A spike like that is indicative of higher volatility, signaling investor fear and uncertainty. Recommended Link [New Currency Goes “Woke” – Washington and Lincoln to Vanish?]( [image]( The money that we grew up could soon be replaced. A new type of currency is being rolled out. This is a fast-moving story. [Get the full details here.]( -- The Relationship Between the Fed and the Stock Market 2018 saw two big market pullbacks. The Fed was at the center of both. The first 10% drop on the S&P 500 occurred in February, right after Jerome Powell was installed as Fed chief. That’s not unusual. The market tends to test the new Fed chairman by selling off. Powell committed to doing nothing too drastic. Stocks recovered from the February low and traded out to new highs in August. The second setback began in October. It followed a statement by Powell that interest rate hikes and quantitative tightening were on “automatic pilot.” The market swiftly showed its displeasure with a 20% plunge in the S&P 500. Chastened, Powell made soothing statements, saying the Fed would be “patient” about raising rates any further. The S&P 500 recovered somewhat, but still ended 2018 down nearly 7%. [Featured: 100,000 People Have Taken the Plunge Don’t Be Left Behind…]( Why Is the Fed Talking About Quantitative Tightening Now? Today, the market looks similar to late 2017… As I told you [last Tuesday]( the Dow and the S&P 500 have both experienced huge upticks from their March 2020 pandemic lows. And now, there is also rising inflation to worry about. At last count, it was at 6.8%, the highest level since 1982. In response to an overheating economy, last November, the Fed started to “taper” the bond purchasing (QE) program it had introduced the previous year to support the economy during the pandemic. The 5-Year Treasury yield has gone up by 0.6% since October… And after trading in the low-90s in the middle of the year, the U.S. Dollar Index is currently at around 96… The VIX is currently reading around 20, up from the mid-teens at the start of the year. Now, it’s no coincidence that bond yields are trending higher. Any reduction in the Fed’s bond purchases removes a major source of the demand from the bond market, so prices fall. And bond yields move inversely to price. The recent rally in the U.S. Dollar Index is also no surprise. Lower Fed bond purchases also reduces the number of dollars in circulation. But this time, these effects have already started before the Fed has even officially started QT. And the markets reacted strongly to the Fed’s balance sheet runoff talk. The Fed released its December meeting minutes on Wednesday afternoon. By the following morning, the S&P 500 had dropped by more than 2%. Recommended Link [45 Days Until Bitcoin Crashes To $25,000?]( [image]( This may ruffle your feathers… But please pay very close attention… Because while everyone obsesses over the latest price of Bitcoin… A new threat has emerged under the surface of the world’s top crypto. It has nothing to do with Bitcoin’s environmental impact or its volatility. And 1 out of 10 Americans don’t even know this threat exists. There’s a good chance it could send Bitcoin crashing to $25,000 in the next 45 days. What is this threat? And what can you do to prepare? [Click here to find out.]( -- Keep Your Powder Dry, But Be Ready to Fire Now, as I said last week, [I don’t believe we are anywhere close to a recession](. However, I do expect 2022 to deliver a good-sized wobble, likely up to 10%, sometime in the first quarter. That will present a very attractive buying opportunity for stocks. But it might be short-lived. If we see a pullback of that magnitude, I expect the Federal Reserve to begin walking back its hawkish statements, just like it did at the end of 2018. I wouldn’t be surprised if it announced one interest rate hike and then called it quits. If that happens, the stock market will rebound strongly because right now, investors are expecting at least three interest rate hikes this year from the Fed. So for now, keep your powder dry… but put together your wish list of stocks you’d like to add to your portfolio. Your chance to swoop in and pick them up at a discount could come soon… Regards, Eoin Treacy Contributing Editor, Inside Wall Street with Nomi Prins --------------------------------------------------------------- Like what you’re reading? Send your thoughts to [feedback@rogueeconomics.com](mailto:feedback@rogueeconomics.com?subject=RE: Watch the Fed Closely for Signposts to Profit). --------------------------------------------------------------- MAILBAG Today in the mailbag, Norman J. disagrees with Nomi on bitcoin’s importance as a long-term investment, as she wrote about in her recent essay, [These Two Assets Will Play a Crucial Role in Protecting Your Long-Term Wealth]( There is money, investments, currency, and speculation. Gold and silver are money (and silver is far more than money… it is a strategic metal). They both meet all the qualifications of true money… including intrinsic value. Investments can be good or bad, but they ultimately stand or fall based upon their long-term profitability. Currency is a rotting medium of exchange, created by government… and it always returns to its intrinsic value, which is nothing. Speculations, such as bitcoin, have no intrinsic value. They rely on folks’ willingness to bid up prices based upon the belief that someone else will pay more for something than you did. Blockchain is game-changing, but cryptocurrencies are no more than digital tokens priced in rotting currency. A useless token that can be hacked, corrupted, or declared illegal by government edict. – Norman J. Meanwhile, Robert C. believes the time has come for a new gold standard… Dear Nomi, congratulations on your new appointment. As you know, we have lost approximately 90% of our purchasing power since the Federal Reserve opened for business in 1914. It is time for a new gold standard. As you know, gold cannot be devalued. As J.P. Morgan stated in his testimony before Congress in 1914, “Gold is money. Everything else is credit.” – Robert C. Do you agree with Norman that cryptocurrencies are “useless tokens”? What are your views on the “gold is money” debate? Write us at [feedback@rogueeconomics.com](mailto:feedback@rogueeconomics.com?subject=RE: Watch the Fed Closely for Signposts to Profit). IN CASE YOU MISSED IT… [Holy Cow, Only $19!]( “Hi, my name is Jeff Clark. For the past 36 years, I’ve helped people from all walks of life make money in the markets. Retired stockbrokers… presidents of companies… people with almost no financial experience… and everything in between. But I haven’t done it the usual way… My method is different. It’s unlike anything you’ve probably ever seen before. [We’re unveiling it right now for just $19.]( That’s the lowest price currently offered for a trading research service… And it won’t be available for long. [Watch a ‘10-second live demo’ of this method]( to see how it works." [Watch now!]( [image]( --------------------------------------------------------------- Get Instant Access Click to read these free reports and automatically sign up for daily research. 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