The only thing to fear is the Fed

Understanding yesterday’s market [Click to view in browser](. [TODAY IS IT!]( You will no longer receive Markets and Minds after this issue. The transition to our fantastic new newsletter is complete. [Be sure to SIGN UP for THE JUICE before it's too late.]( --------------------------------------------------------------- Financial Pros Top 5 Crypto Searches For The Week #1 Bitcoin 3789 #2 Dogecoin 2,292 #3 Ethereum 2,092 #4 Litecoin 2,023 #5 Cardano 886 Eyes were on Robinhood (HOOD) as they [reported earnings](. While they did well overall, Dogecoin accounted for 62% of their crypto revenue. And that could be a problem. In their announcement, Robinhood noted that trading volume was on the decline. While that was inevitable at some point, it comes at a precarious time. As we discuss in our main story, a change in the Fed’s position could take a bite out of crypto assets in a hurry. We’re not saying it happens tomorrow. But you can look back at the last crypto craze a few years ago for guidance. --------------------------------------------------------------- Freshly Squeezed 348,000 people filed for unemployment benefits last week, lower than the week before. Are things moving in the right direction? [Calculated Risk takes a deeper look at the numbers.]( In our main article, you’ll notice we don’t like AMC (AMC) in the coming months. But do hedge funds agree? [Insider Monkey covers what the big money managers have to say.]( Some folks are pretty bearish on this market. [Charles Hugh Smith said the smart money has already sold.]( Do you agree? --------------------------------------------------------------- The only thing to fear is the Fed [Federal Reserve Bitcoin Meme GIF] - Fed minutes lay the groundwork for tapering asset purchases later this year. - The Fed will still keep its Fed Funds rate at 0%. - We should expect them to announce a taper in September. - Both stocks and bonds are likely to suffer. - Banks are among the winners we list below that benefit from higher rates. Everyone knew the Fed talked in their last meeting about reducing support this year. Yet, somehow markets acted like your friend who screams at every movement in a Halloween haunted house. Even though they know it’s coming, they’re too high-strung. That’s effectively where markets are right now. Our economic outlook for several years let alone several months is murky at best. We know a lot of you want to know what to expect. While there are no guarantees, we put together a blueprint you can use for your investment game plan. But before go time, we want to make sure you understand what we’re dealing with. Understanding the Fed’s Tools Last year, the Fed embarked on the largest monetary expansion in history. They hit markets with a 3-pronged approach: - Lower bank interest rates - Buy mortgage backed debt and U.S. treasury debt - Purchase corporate debt The last one was controversial because the government directly manipulated the market. Luckily it’s all done. The top two represent the core tools in the Fed’s belt. Let’s briefly explain how they work. Fed Funds Rates Law requires banks to keep a certain amount of money on hand to cover customer accounts, which they earn zero interest on. Thus, they want to get as close to that threshold as possible. To manipulate their holdings around the margins, banks will borrow and lend to one another at the Fed Funds rate, which is not backed by collateral. The higher the rate, the less a bank can borrow to maintain its reserves. Consequently, they lend out less money to avoid not meeting those levels. Buying Debt Many forms of debt in the U.S. and globally are set by the U.S. treasury rates. Mortgages rates come from a spread on top of the U.S. 10-year yield. Corporate debt is priced based on a spread on top of whatever the matching maturity rate is for the U.S. treasury (IE a 2-year debt note for Amazon will be priced at the 2-year Treasury yield plus a little on top). By purchasing more government debt, the Fed keeps rates low for those same loans, while also providing the government a way to borrow at very cheap rates. What to expect First up will be the reduction of debt purchases known as ‘taper.’ When the Fed tried this back in 2013, it went over rather poorly. Market participants didn’t know it was coming. The announcement shattered their confidence, sending equities plummeting. This time around, the Fed made sure we knew what to expect months in advance. They simply let the data determine when they made their moves. Our expectation: The Fed will announce its plans to ween off bond-buying in September. They won’t actually start this until December. What it practically means: Demand for U.S. debt and mortgage backed debt will decrease. Either new buyers step in or prices on debt fall until they find enough demand. Remember: When bond prices fall, their yields (interest rates) go up. Imagine a bond that pays $5 interest per year. At $100 per bond, you make 5%. At $90 per bond, you make 5.56%. Winners: Banks win in this scenario. Not only do they get paid more for their cash, they typically make more per loan than before. The U.S. dollar should strengthen as well. Lower bond purchases mean the Fed isn’t printing money out of thin air to buy debt, adding more money supply into the economy. Savers do much better in this environment. Retirees who own a lot of bonds for safety now get larger payments. The American consumer also wins. Their paycheck goes further, plus imports from abroad get even cheaper. Losers: Pretty much every other type of stock. High growth companies drop because all those future profits are now worth less since the opportunity cost is higher. We’re talking about companies that have yet to turn a profit. Speculative stocks and assets tend to take it on the chin as well. The more growth is loaded into the next few years vs. further down the road, the less likely they are to suffer drops. Utilities rely on dividend payments to attract investors. When bonds provide higher interest rates, utility stocks need to drop to keep pace. Commodities also take it on the chin since they are priced in dollars. International debt, especially emerging markets, also suffers as much of it is priced in U.S. dollars. While it should be obvious, anyone owning U.S. treasuries gets hurt. Ohh and most importantly, inflation loses. Note: Treasuries are what most people call ‘risk-free’ since the likelihood of the U.S. defaulting is...well if they default we have much bigger problems to worry about. The rate on these is your base opportunity cost. Think about 1981 when 10-year treasury yields delivered almost 20%! Why bother investing in any stock unless it’s super cheap? Stocks we like as rates rise: JP Morgan (JPM), Inverse 20+year treasury bonds (TBT), Hilton Hotels (HLT), Target (TGT), Home Depot (HD), Starbucks (SBUX), Google (GOOGL), eBay (EBAY). Stocks we want to avoid as rates rise: Nextera Energy (NEE), American Electric Power (AEP), Annaly Capital (NLY), Kinder Morgan (KMI), International Business Machine (IBM), Gamestop (GME), AMC (AMC). To ensure delivery of all emails, [whitelist us](. You are subscribed to email updates from [InvestingChannel](. To stop receiving these emails, you may [unsubscribe]( now. InvestingChannel, Inc., P.O. Box 118 New York, NY 10018. Disclaimer: This is not investment advice. This InvestingChannel, Inc. newsletter is for information purposes only and opinion-based. Futures, forex, stock, and options trading are not appropriate for all investors. There is a substantial risk of loss associated with trading these markets. Losses can and will occur. No system or methodology has ever been developed that can ensure returns or against losses. No representation or implication is being made that using any of these methodologies or systems will generate returns or ensure against losses. Investors should be cautious about any and all investments and are advised to conduct their own due diligence prior to making any investment decisions. [Link](