This time for sure, don't fight the Fed

Any tapering by the Federal Reserve will result in recession.

By Stock Traders Daily Jul 5, 2013 3:20PM

Hisham Ibrahim, CorbisThere is an old saying on Wall Street, don't fight the Fed. This means that when the Federal Reserve is easing monetary policy investors should be buying the market, and conversely when the Fed is tightening they should not. In 2006 I conducted a study that analyzed this philosophy in both tightening and easing cycles; what I discovered surprised many people then, but comparisons to today may surprise even more people now.

 

First of all, in normal economic cycles prior to 2008, when the Federal Reserve actually could adjust interest rates to affect monetary policy, they did so based on the health of the economy. Economic growth went through cycles and the stock market did as well, but at all times, even during the Internet debacle, the economy could stand on its own two feet. The viability of future growth may have been questionable from time to time, but underlying economic activity was still able to sustain itself.


From 1981 through 2007 the economy was in the third major up-period in U.S. history according to the Investment Rate (StockTradersDaily). This tool identified the conditions that existed even after the Internet debacle as being within a naturally positive economic cycle, and thus the economy was still sound enough to support itself.

 

Conceptually, if the Federal Reserve is easing monetary policy because the economy is weak investors should expect weak stock market conditions too, and that is exactly what happened prior to 2008.  When the Fed applied easy monetary policies by lowering interest rates, the market came under pressure. Conversely, when the Fed applied tight monetary policies, they did so because the economy was too strong, and during those tightening cycles the market performed quite well. Because the economy was strong and despite the Fed's efforts, stocks reacted positively during tightening cycles.

 

Thus, prior to 2008, investors should actually have fought the Fed, but that may not be the case today. The Investment Rate told us we were in a positive economic cycle then, the economy could stand on its own two feet, and investors could comfortably assume that monetary policy was changing because of stronger or weaker economic conditions than the Fed liked. Inflation is obviously part of this equation, but economic conditions are the focal point and always have been.

 

Even after 2008, economic conditions have been the focal point, but material changes have also happened.  In December 2007 the end of the third major up period in US history, the one that began in 1981, came to an end according to the Investment Rate.  The end of that upward sloping period also brought the beginning of the third major down period in U.S. history.  As a result, the underlying conditions in our economy are different today than they were even during the Internet debacle.  The underlying conditions in our economy today are deteriorating on a naturalized basis, where before they were actually improving on a naturalized basis year after year.

 

The difference here is very important to recognize, and it leads us to a determination when we reconsider the adage of not fighting the Fed. During upward sloping cycles in the Investment Rate, changes to interest rates gave us an indication of market direction as noted above, but in this downward sloping cycle, with interest rates at virtually zero and monetary policy based solely on capital infusion, the playing field has changed.

 

Now, the the economy is deteriorating naturally and only the infusion of capital by the Fed has kept it afloat. We are in a third major down period in US history according to the Investment Rate, and the Fed has to infuse more and more capital into the system every year to offset the deterioration. It cannot taper stimulus policies because the economy will contract measurably, and therefore the adage of don't fight the Fed is not what it was prior to 2008.

 

If the Fed begins to tighten, or taper in this case, it will be removing the lifeblood of the economy and what we knew to be true prior to 2008 will no longer be so. This time, don't fight the Fed will mean sell everything, including housing, stocks, businesses that cannot sustain a recession/depression, and any other asset class that might be dependent on new money to grow. When I say sell everything, in particular I mean things tied to the direction of the SPDR Dow Jones Industrial Average ETF (DIA), SPDR S&P 500 ETF Trust (SPY) , PowerShares QQQ Trust, Series 1 ETF (QQQ), and iShares Russell 2000 Index ETF (IWM).

120Comments
Jul 6, 2013 6:18AM
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TOP-11 "ONLY IN AMERICA" OBSERVATIONS -- BY A CANADIAN*

1) Only in America could the rich people - who pay 86% of all income taxes - be accused of not paying their "fair share" by people who don't pay any income taxes at all.

2) Only in America could people claim that the government still discriminates against black Americans when they have a black President, a black Attorney General, and roughly 18% of the federal workforce is black while only 12% of the population is black

3) Only in America could they have had the two people most responsible for our tax code, Timothy Geithner, the head of the Treasury Department and Charles Rangel who once ran the Ways and Means Committee, BOTH turn out to be tax cheats who are in favor of higher taxes.

4) Only in America can they have terrorists kill people in the name of Allah and have the media primarily react by fretting that Muslims might be harmed by the backlash.

5) Only in America would they make people who want to legally become American citizens wait for years in their home countries and pay tens of thousands of dollars for the privilege while we discuss letting anyone who sneaks into the country illegally just 'magically' become American citizens.

6) Only in America could the people who believe in balancing the budget and sticking by the country's Constitution be thought of as "extremists."

7) Only in America could you need to present a driver's license to cash a check or buy alcohol, but not to vote.

8) Only in America could people demand the government investigate whether oil companies are gouging the public because the price of gas went up when the return on equity invested in a major U.S. oil company (Marathon Oil) is less than half of a company making tennis shoes (Nike).

9) Only in America could the government collect more tax dollars from the people than any nation in recorded history, still spend a Trillion dollars more than it has per year - for total spending of $7-Million PER MINUTE, and complain that it doesn't have nearly enough money.

10) Only in America could politicians talk about the greed of the rich at a $35,000.00 a plate campaign fund-raising event.

11) Only in America can a man with no background, no qualifications and no experience ... and a complete failure at his job ... be reelected
Jul 5, 2013 5:36PM
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Lets see if I have this right.   If the fed stops printing money the economy tanks.  All that says is the economy can't stand on its own,   This can only end one way
Jul 5, 2013 4:57PM
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That last paragraph is pretty damn scary.  This is the first time I've seen that advice anywhere on the MSN Money site - if the Fed tightens or tapers, SELL EVERYTHING!

Wow!

Jul 5, 2013 5:58PM
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I absolutely can't believe MSN allows the truth in an article.  

To summarize:  We're screwed.
Jul 5, 2013 5:50PM
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Well I think that's what we have been saying for several years.   That's the whole point isn't it?  Since the entire recovery has been due to money printing it will collapse when they quit printing money. 

 

People no longer have access to jobs that pay a living wage.  Free trade necessarily means that our standard of living will equalize with those of our trading partners.   The last two bubbles were attempts to camouflage that from the general public.  We have been artificially propping ourselves up since the 80's, falsely believing that we were prosperous when we were actually selling our future for short-term stock or housing profits.   It wasn't real prosperity then and what the Fed is doing isn't real now.

 

When they stop it will go back to where it was in 2008, only the banks will be healthier. 

Jul 6, 2013 6:15AM
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For all of you who have made disparaging remarks about

President Obama , please read the following...

 

I'm sure most of us have read the so-called comparison of Lincoln

and Kennedy , but did you ever consider the relationship between

Obama and Lincoln ?

 

You might be surprised...

 

Parallels of Abraham Lincoln and Barack Hussein Obama :

 

1. Lincoln placed his hand on the Bible for his inauguration.

Obama used the same Bible.

 

2. Lincoln came from Illinois. Obama comes from Illinois        .

 

3. Lincoln served in the Illinois Legislature. Obama served

in the Illinois Legislature.

 

4. Lincoln had very little experience before becoming President.

Obama had very little experience before becoming President.

 

5. Lincoln rode the train from Philadelphia to Washington for his inauguration. Obama rode the train from Philadelphia to Washington

for his inauguration.

 

6. Lincoln was a skinny lawyer. Obama is a skinny lawyer.

 

7. Lincoln was a Republican. Obama is a skinny lawyer.

 

8. Lincoln was in the United States military. Obama is a skinny lawyer .

 

9. Lincoln believed in everyone carrying their own weight. Obama

is a skinny lawyer.

 

10. Lincoln did not waste taxpayers' money on personal enjoyments .

Obama is a skinny lawyer.

 

11. Lincoln was highly respected. Obama is a skinny lawyer.

 

12. Lincoln was born in the United States . Obama is a skinny lawyer.

 

13. Lincoln was honest, so honest he was called Honest Abe .

Obama is a skinny lawyer

 

14. Lincoln saved the United States.  Obama is a skinny lawyer.

 

AMAZING, ISN'T IT?
Jul 5, 2013 4:50PM
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You would think people who graduated from Harvard would review history FIRST, before sabotaging the economy and force-shifting the nation into economic indenture.
Jul 5, 2013 8:56PM
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oh come on, it's not so bad.  as a nation, including unfunded entitlements, we are only about $150 trillion in debt ... and at a dollar a second you can pay back a trillion dollars in 31,700 years, so we can simply start paying $30,000 back per second or a $1 trillion per year and have everything paid off in 150 years!

 

oh, there will still be some interest of around $300 billion per year, and of course the annual budget deficit of about $700 billion or so .... so we pay pay down a trillion per year and we spend a trillion over what we collect per year and we print two trillion per year to make the math work!

 

problem solved ... don't worry so much ... the Fed has complete control and vision here ...

Jul 5, 2013 6:41PM
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The Great Recession never ended!  This sinking economy has been kept (marginally) afloat by reckless injection of trillions of dollars of imaginary money.  Even as the money supply has expanded, the velocity of the money supply has slowed to a crawl.  That's what Depressions are made of.

 

We'll see the Fed pull back, the economy go straight into the tank and enter a period of deflation unseen for the last 80 years.  Then (brilliantly!) the Fed will resume enormous "stimulus" of the economy by printing insane amounts of money, and we'll enter a period of hyper-inflation.  This process will destroy the value of money, and our wealth will evaporate.  Buy Gold with both hands!

Jul 5, 2013 11:19PM
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Has anyone noticed that these media money guys who were very positive about the economy 6 to 12 months ago are all of a sudden getting smart or tired of saying the King has clothes to please their bosses.....they are realizing or finally telling the truth....no we are not in good shape...no matter how much these govt. print ....one thing is for sure....it will not matter....the market and good fundamentals will turn this market and the economy upside down....to clean out the trash.....very painful indeed.
Jul 5, 2013 6:48PM
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Okay: "This time, don't fight the Fed will mean sell everything, including housing, stocks, businesses that cannot sustain a recession/depression​,..."   Is there ANY point at which we say there is to much QE?  'We're at a 28% inflation rate right now,  When the dollar is worth 50% less?  When the dollar is worth 100% less?  When a loaf of I bread costs $50.  Just when?

Jul 5, 2013 7:33PM
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Well, that is extreme.  Sell everything?  Ok gold was going to $5000 before it tanked.  So much for advice. 

 

Ok, fed tighting will not be fun, but not the end of the world.  Stagnation like the 15% inflation days of the 80's ... sure.

Jul 6, 2013 1:43AM
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The consequences of being technically insolvent are increasingly being felt.  No matter how much deep denial is prevalent, being in an exponential debt situation does not end well.  Coupled with deep denial about how much inflation is present, and the recipe for something bad to happen is all there.
Jul 5, 2013 6:52PM
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Nobody ever made money thinking the world was going to fall apart. Succesful investors are optomists by nature. The fearmongerers write articles for MSN from their parents' basement.

Jul 6, 2013 1:04AM
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Don't forget France after 1789, this country during the revolution, most countries after WWI and WWII.

 

They all INFLATED and their currencies ALL LOST most of their purchasing power.

 

They ONLY way this is going to end, if the fed doesn't stop creating money out of thin air, is massive hyperinflation like Germany 1914-1923. The value of the German mark went from 4.2 marks to the American dollar in 1914, to 4,200,000,000,000 in late 1923. For a very good history of the period read When Money Dies.

Jul 5, 2013 6:50PM
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The fed follows the economy instead of leading the economy just like Goldspan's irrational exuberance for two years before beginning tightening.
Jul 6, 2013 1:09AM
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Even if the value goes down to $500 an ounce for gold, and $30 an ounce for silver, it's STILL going to be worth more than fed paper!

 

Jul 5, 2013 11:39PM
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The Fed is setting us up for massive inflation. Printing money  is debasing the currency. It is the same as in the Roman Empire. Except they just put less silver in their coins. Which in the long run raised prices. People had to be paid more because the money was worth less. Food costs more and taxes went up. People started to work less. They hoarded goods because  they had to pay more taxes to support the government. It also happened in Germany. Where a wheel barrel was worth more then the money in it.
Jul 6, 2013 6:11AM
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AMERICA IS DYING!!!

OBAMA IS DRIVING NAILS IN YOUR COFFIN AS WE SPEAK!!!!!

HELL - THE WHOLE THIEVING, LYING, US GOVERNMENT IS HELPING HIM - ALONG WITH THE MEDIA - STUPID VOTERS - HILLARY - MUSLIMS - NEGROES -  MEXICANS - THE 47% - DETROIT - AND TOO MANY OTHERS TO NAME!!!

HITLER, LENIN, STALIN, AND KHRUSHCHEV ARE WINNING!!!!!!!!!!!!!!!!!!!!!

ENJOY!!!!!
Jul 6, 2013 6:17AM
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HOW COULD THIS MAN, BE THE PRESIDENT OF THESE GREAT UNTIED STATES? I mean really, a fourth grader........


Barack Obama, at a recent rural elementary school assembly in South Carolina, asked the audience for total quiet.

Then, in the silence, he started to slowly clap his hands once every few seconds, holding the audience in total silence.

Then he said into the microphone, 'Children, every time I clap my hands together, a child in America dies from gun violence.'

 

Then, little 4th grade Darrell, with a proud South Carolina drawl, pierced the quiet and said:   "Well, ****, stop clapping!”


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