Playing the Fed’s bluff

The market has risen sharply off of its June lows through July and August. This was largely driven by the lower inflation reading (now down to 8.5% from 9%+). Is the market’s reaction justified?

“It’s not about whether you are right or wrong, but about how much you make when you are right, and how much you lose when you are wrong.”– Stanley Druckenmiller


Based on the inflation headline reading, a case can be made that inflation is easing and the Fed will slow its tightening pace. That potential has buoyed the market in hopes that less aggressive monetary policy will push stocks higher. Remember, don’t fight the Fed! If the Fed goes easy, the market typically rises.  The notes coming out of Wednesday’s meeting implied a 0.5% rate raise in September–as I suggested would happen in this blog– rather than the market’s anticipated 0.75% rise back in June and July.

However, a closer look at the underlying data indicates the market’s reaction may be wishful thinking. Is the Fed going to hang a “Mission Accomplished” banner at Jackson Hole or the September FOMC meeting? Highly doubtful.

The cooling inflation pressures were driven by Apparel, Appliances, Used Vehicles, Hotels, Car & Truck Rentals, and Airfares.

In contrast, Furniture, Housekeeping Supplies, New Vehicles, Beverages, Primary Residence Rent, Vehicle Repairs & Insurance, and Food all increased. These categories are the ones the Fed is most concerned about. They are still rising (!) and there is no clear evidence inflation is receding.

And lets not forget that wages are up, while production has now begun to fall….stagflation, anyone?


Our take – the Fed will not view the latest inflation report as clear and convincing evidence that inflation is receding, and the market’s hopes for a tightening reversal may be dashed by September. The tightening pace may slow, but that is different from cutting rates. Don’t fight the Fed.

1965-1982 sideways market

In our research paper – recently sent to VT Update newsletter subscribers – we noted that the current era may bear some similarity to the 1965-1982 period. Back then, the Dow stayed below 1000 for 17 years, and inflation meandered and spiked.

Here’s a quote from the very man who orchestrated the Fed’s very incorrect activities, causing the same problem we may be facing here:

“There were so many feeble efforts to deal with inflation in the 1970s, they said ´don’t tighten monetary policy too aggressively, you will get some unemployment,´- so we went a decade that way, and we ended up with more inflation and more unemployment.” – Paul Volcker with Ray Dalio in 2017

Another quote

“Fed Chair Jerome Powell needs to “shock the market” as part of the central bank’s fight against inflation. If you want to change someone’s view… you have to hit them in the face,” Henry Kaufman (renowned economist)

If the Canadian BOC and US Fed think that inflation is falling, the average Joe and Jane do not necessarily see the same outcome when it comes to “the big 3” costs. Note how we are looking at the same consumer stress level as seen during the 1965-1980 period:

Risk appetite may fade into the Jackson Hole meeting (end of this month)

Risk assets remain vulnerable to a selloff, market volatility is misleadingly low, and the market is playing a dangerous game of ‘call the Fed’s bluff’.

Below is the VIX chart. Note how my orange horizontal line of 20 represents some sort of support/resistance point over time. Markets can trend up so long as the VIX trends lower – seen by my green arrows on the chart. If markets continue to illustrate low volatility, the 15-20 zone will likely be hit. Note how that zone inspired the current bear market. One needs to keep an eye open for an upwards reversal in the VIX as it breaches the 20 line.


So–where do we hide?

In a nutshell: Value, low beta, gold, commodities (including food- see comments below) and cash.

Below are the comparative value vs. growth ETF’s from Vanguard. VTV (value) vs VUG (growth).

The chart for growth is encouraging, but there is a lot of damage to repair.

The safer bet is value- a sideways trend.

Food/agricultural stocks

Perhaps its not a bad idea to explore some agricultural plays. There has been a definitive move towards pressuring the independence of our food choices and farming practices in the world today. This obviously leaves long termed concerns of authoritarianism politics  – but to focus on the investment side, there may be opportunities for investors in the near-term.

Some quotes by 3 Portfolio Managers – taken from BearTraps & their Portfolio Management firms contacts on the subject:

“Bill Gates is buying farmland. They is clearly going to be food issues and a clear plan to make beef prohibitively expensive – you won’t miss it is in tow – very clear.” – PM NY

It isn’t just Bill Gates. It is Blackrock, Blackstone etc. They’re buying up all the land as part of the great reset.” – PM London

“They have been hoping for continued asset inflation and globalization with falling wages as an output in the west, as the basis for a sustainable government funding model.” – CIO NY

The iShares “COW” ETF is the only Canadian ETF in the agriculture sector. It holds a number of food, farming products (potash etc.) and agriculture machinery stocks. It doesn’t hold the underlying commodities. For that, you would likely need to examine agriculture commodity futures orientated ETF’s, such as the Investco ETF (DBA) or others. They have similar appearances so I just posted the COW chart below. Looks like a triangle setup to me. A definitive breakout might be bullish, with a possible target near its old highs.

As an aside – Craig mentioned to me today that the “reset” plan towards plants and bugs for food still requires energy. Energy, that cannot come from windmills and solar alone. We continue to like that space in the longer run.

Click the image below to register for my upcoming MoneyShow appearance on Saturday Sept 17th:


  • Thanks for doing these regular updates. I always read and sometime reread them and will take a look at the notes I took from your course to help understand how to look at positioning in the context of where the various market segments are trading.

    • Harry–thanks for the note. Glad you have the Online TA course–I designed it so readers of the blog would have greater clarity in my system.

  • Hi Keith,
    Here is an astute contrarian view from David Rosenberg. So maybe the bear market bottom is still a ways away despite the recent rallies of S&P500 & Nasdaq, into 2023 given David’s recent comments.

    Widely followed Canadian economist David Rosenberg disagrees. In a recent article, he wrote that we are still in the “early chapters” of this downturn. “Bear markets only end in the mature stage of the recession when investors see the whites of the eyes of the recovery, only after the Fed has dramatically sliced rates, and not until the yield curve is steeply sloped…Playing the long game means not going long until these features appear,” he wrote.

    • Can’t say I would disagree with Rosenberg – our research report recently sent to newsletter subscribers described a prolonged go-nowhere market potential. However–As a TA first and foremost, I do not predict such things (although I can examine evidence and project probable outcomes, as I often do on this blog). My view is – “Don’t predict, do prepare” (Howard Mark’s famous saying).
      How to prepare:
      Probable neartermed move is for a selloff into the recent rally. The real determinant is to see if markets can hold the last lows. If not–it will get ugly.
      If they do hold support or don’t fall much, the picture is possibly sideways (per our research paper sent to newsletter subscribers).
      If the market sees a selloff and that is followed by a reversal and a breakout of old highs –it is likely we have entered a bull.

      Not knowing which scenario plays out – we must maintain an open mind to any possibility— and trade as these support/resistance zones tell the tale.

  • On Friday, August 26th saw 1,000 point drop on the Dow, 500 points on the Nasdaq, each over 3% lost. I can’t say I was surprised, considering Keith had raised the red flag earlier this month, about a pump and dump rally, or sucker’s bear market rally.

    Keith is the man.


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