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March 27, 2015, 11:15 a.m. EDT

Has the Fed lost control?

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About Michael A. Gayed

Michael A. Gayed, CFA, winner of the 2014 Dow Award, is chief investment strategist and co-portfolio manager at Pension Partners, LLC., an investment advisor which manages mutual funds and separate accounts according to its ATAC (Accelerated Time and Capital) strategies focused on inflation rotation. Prior to this role, Gayed served as a portfolio manager for a large international investment group, trading long/short investment ideas in an effort to capture excess returns. From 2004 to 2008, Gayed was a strategist at AmeriCap Advisers LLC, a registered investment advisory firm that managed equity portfolios for large institutional clients. In 2007, he launched his own long/short hedge fund, using various trading strategies focused on taking advantage of stock market anomalies. Follow him on Twitter @pensionpartners and YouTube

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By Michael A. Gayed

So let me get this straight. The Fed removes the buzzword of the year "patient," but says that its removal does not mean they are impatient. Economic data continues to weaken, and somehow all that we hear talked about is an interest rate "lift-off" despite zero evidence of inflationary pressure justifying a rate hike cycle? Am I the only one who thinks the entire discussion around central bank policy is a bit crazy?

Here's what we know: every time people are convinced of a coming "rising-rate environment," the rising rates never come. The world is obsessing over something which may be largely irrelevant if indeed the United States and Europe are entering a deflationary period. With oil and commodities more broadly no longer serving as a source of cost-push inflation, and economic data putting into question domestic economic strength, at what point will the narrative shift from rising rates to permanently lower ones, a la Japan?

"I'm selfish, impatient, and a little insecure. I make mistakes, I'm out of control, and at times hard to handle. But if you can't handle me at my worst, then you sure as hell don't deserve me at my best."

—Marilyn Monroe

I hope for all our sakes that's not the case, but I, for one, believe that the invisible gorilla no one is seeing is context. Trillions of dollars of stimulus, and there still is no escape velocity whereby the economy can sustainably perform strongly without monetary intervention.

The buy-and-hold crowd in U.S. equities doesn't seem to care or want to acknowledge immense risks that are building up. That risk in my opinion? The Fed has lost control of the economy and no amount of monetary action appears to be sustainably causing robust growth.

For now, no one cares because the dominant theme has been that low rates are good for stocks. That should change eventually, and likely when an actual correction hits. If that happens, our alternative ATAC Inflation Rotation /zigman2/quotes/202546180/realtime ATACX +0.72%  and equity ATAC Beta Rotation  mutual funds can position defensively before that happens given the leading indicators of volatility we focus on. Those leading indicators of volatility documented in our award-winning papers, utilities and Treasurys, have picked up momentum as of late, signaling higher potential volatility to come in the near-term.

The Federal Reserve was designed to stabilize the financial system following the Panic of 1907, with the dual mandate of producing maximum employment and keeping prices stable through the tool of interest-rate policy. Yes, headline unemployment has been improving, but the number of people no longer in the workforce (the labor participation rate) suggests the job market is not robust.

As to keeping prices stable? Explain to me the below, which shows the iShares Barclays TIPS Bond Fund ETF /zigman2/quotes/200600110/composite TIP +0.63%  relative to the PIMCO 7-15 Year Treasury ETF . As a reminder, a rising price ratio means the numerator/TIP is outperforming (up more/down less) the denominator/TENZ. A falling ratio in this case means falling inflation expectations. And boy have they been falling.

Should the trend not soon reverse, in my opinion, the message is very clear: the Fed has lost control of inflation expectations, and no amount of monetary stimulus can reverse it. For the Fed to be able to raise rates, likely this relationship needs to reverse and rise. That simply is not happening, nor can it with the dollar as strong as it has been, and with Europe effectively exporting deflation to us through the Euro collapse.

In practice this can mean risk is rising, and risk matters. The cycle for non-volatility and conviction in the Fed, I believe, is nearing its end. The confidence Fed officials place in their actions will, at some point, turn to doubt by market participants.

Don't lose control of your portfolio when that happens.

The Funds' investment objectives, risks, charges, expenses and other information are described in the statutory or summary prospectus, which must be read and considered carefully before investing. You may download the statutory or summary prospectus or obtain a hard copy by calling 855-ATACFUND or visiting Please read the Prospectuses carefully before you invest.

Mutual fund investing involves risk. Principal loss is possible. Because the Funds invest primarily in ETFs, they may invest a greater percentage of its assets in the securities of a single issuer and therefore is considered non-diversified. If a Fund invests a greater percentage of its assets in the securities of a single issuer, its value may decline to a greater degree than if the fund held were a more diversified mutual fund. The Funds are expected to have a high portfolio turnover ratio which has the potential to result in the realization by the Fund and distribution to shareholders of a greater amount of capital gains. This means that investors will be likely to have a higher tax liability. Because the Funds invest in Underlying ETFs an investor will indirectly bear the principal risks of the Underlying ETFs, including but not limited to, risks associated with investments in ETFs, large and smaller companies, real estate investment trusts, foreign securities, non-diversification, high yield bonds, fixed income investments, derivatives, leverage, short sales and commodities. The Fund will bear its share of the fees and expenses of the underlying funds. Shareholders will pay higher expenses than would be the case if making direct investments in the underlying funds. The Beta Rotation Fund is new with no operating history and there can be no assurances that the fund will grow or maintain an economically viable size.

All investing involves risks.

Beta is a measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole.

Fund holdings are subject to change and are not recommendations to buy or sell any security. Current and future holdings are subject to risk.

The NAAIM Wagner Awardwas open to all investment practitioners, academic faculty and doctoral candidates in the field. The papers were judged on the following criteria; practical significance to

practitioners of active investing (which NAAIM broadly defines as investment strategies and techniques that improve upon the risk-adjusted return obtainable from a passive, buy-and-hold, investment strategy), quality of exposition, analytical rigor, and novelty of results. An ideal paper would provide evidence of the validity of an active investing approach via an example of a trading system that outperforms the market by some well accepted metric such as risk adjusted return, annual return, drawdowns, etc. Examples of supporting evidence sought include backtesting details and parameter sensitivity analysis. A jury of scholars and investment professionals reviewed and awarded the prizes. The National Association of Active Investment Managers or NAAIM was formed in 1989 as a non-profit association of registered investment advisors who provide active money management services to their clients, in order to produce favorable risk-adjusted returns as an alternative to more passive, buy and hold strategies.

The 2014 Charles H. Dow Award was open to anyone with an interest in technical analysis who submitted a paper prior to the deadline. The Papers were judged on the following standards; the paper is based upon the concepts of technical analysis, the topic is substantive, the research is thorough, include the results of applying the technique to a sufficient quantity of data that covers at least one full market cycle and preferably longer, shows the application of accepted standards of testing (including but not limited to, statistical significance, Chi Square, Monte Carlo simulations, and statistical correlation), the writing meets generally accepted standards of style for publications and college level writing, the analysis and conclusions are useful and enhance the understanding of market action, a paper shall not have been previously published in any media made available for public dissemination, and a paper should be written for an audience of knowledgeable technical analysts. The judging panel reserves the right to not select a winner if it deems that there are no submissions that are worthy of being given the award.

References to other securities should not to be interpreted as an offer of these securities.

ATAC Beta Rotation Fund and ATAC Inflation Rotation Fund are distributed by Quasar Distributors, LLC. No other products mentioned are distributed by Quasar Distributors, LLC.

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