Masters of the Universe

Should governments have a central banking authority or not? It’s an economic question for the ages. Here in the US, it’s been nearly 107 years since the Federal Reserve was born, an entity which was created in part to limit the frequency and severity of financial crises. Throughout the 20th century and over the last two decades, “The Fed” has been credited for saving our economy and further bolstering our global economic superpower status. The Federal Reserve has also been blamed for fostering monopolies (e.g. banking, technology), destroying the middle class through socialist-tinged bailouts for the wealthy and even providing the air that inflates financial bubbles…then ironically called upon to heroically clean up the mess after the bubble bursts.

History may look back at 2020 as simply another year when the Fed came to the rescue. Most will agree that the seismic impact that the pandemic continues to have on the economy warranted Fed action. The approach, scale and magnitude of intervention is, however, debatable. The incessant and ever-increasing degrees of intervention that have occurred over the last few recessions may have dire consequences. As an example, take a look at the following graph:

20200822_chart1_sp500_gdp_ratio

During the mid/late 90’s, equity valuations ran far ahead of the pace of economic growth. Fast forward to today and we’ve surpassed that 2000 peak. Back then, it was “irrational exuberance”, financial industry deregulation, and other factors. Now it’s largely Fed intervention.

During the last few recessions, the Fed has chosen to directly and indirectly assist corporations which, lacking confidence, opportunities and creative energy to reinvest, simply buy back shares (despite the Fed’s efforts to throttle this impulse). Unless more focus is made on boosting the GDP part of the equation, the Fed is merely inflating another bubble.

The federal deficit has also been creeping upwards, but the increase in the rate of change and the correlation between equities and the deficit are accelerating at an alarming (and far too coincidental) rate:

20200822_chart2_sp500_deficit

To a large degree, the Fed now holds the power to further goose (or tank) the stock market, the performance of which is directly correlated to the success (or failure) of a president. Sadly, the Fed appears to have backed themselves into a corner and are unable to tighten monetary policy without wrecking the economy.

What’s an investor to do? It’s long equities until the trend inevitably reverses. Additionally, the rallying cry for gold is growing louder. In his book “The Great Devaluation”, author Adam Baratta provides an exceptionally strong case for going long the precious metal. Even Warren Buffett, who for years said that gold “has no utility”, recently purchased 21 million shares of miner Barrick Gold Corporation.

The bottom line: as long as the Federal Reserve continues with aggressive and consistent interventions, expect irrational valuations and the deferral of “creative destruction”. What is creative destruction you might ask? Stay tuned…we’ll explain in a future blog!

Forte Strategy Update

We executed 10 trades last week using the Nasdaq 3X leveraged ETF (TQQQ) and the volatility index ETF (UVXY) for a net gain of 1.7% compared to a gain of 0.7% by the S&P 500. Our YTD net results so far equal a 1.7% gain compared to a 5.1% YTD gain for the S&P 500. Our YTD max drawdown is 9.5% compared to 33.9% for the S&P 500. We implemented a new optimized dimension to our math models that allows new trades to only be entered during certain time slots during the day. Extensive retrospective math modeling proved the adage “amateurs trade in the morning and professionals trade in the afternoon”. This new code will reduce the number of trades, reduce exposure to market risk and should directionally improve results.

More details about our trading activity can be found by registering on the Collective2 website and searching for Forte Strategy. A running list of these email blogs and general information about Maestro Capital Research can be found at maestrocapitalresearch.com.

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