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Sept. 16, 2015, 1:58 p.m. EDT

Stop caring about the Fed

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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 youtube.com/pensionpartners.

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By Michael A. Gayed


Why anyone cares about the Fed is beyond me when it

  1. Failed at reflation

  2. Failed at increasing economic velocity

Let's be real here and call it for what it is. The only reason people care about the Fed now relates purely to the desire not to engage in critical analytical thinking when it comes to markets. After all, when the narrative is so dominated by fictional central-bank omnipotence, no amount of fundamental, technical or economic analysis matters. All that matters for beta is interest rates.

Indeed, the Fed should raise rates given that low rates really didn't cause any pickup in economic activity. Rather, all low rates did was turn the stock market from a discounting mechanism of the future to yet another failed vehicle for stimulus. The Fed decision in the grand scheme of things is meaningless if neither low rates, nor rising rates, coincides with accelerated economic growth and rising inflation expectations.

"Did you ever stop to think, and forget to start again?"

—A. A. Milne

On the latter point, the Fed's only excuse to hold off is inflation expectations, which have correlated tightly to oil /zigman2/quotes/203483736/composite USO +1.16%  prices. Inflation expectations can be measured in many ways, and matter for asset allocators. Strength in long-duration Treasurys /zigman2/quotes/206026314/composite TLT -1.21% , for example, tends to coincide with dropping reflation hope, and that has implications on stock-market volatility as proven in our award-winning papers (click here to download). Rising inflation expectations tend to be positive ones over long periods of time for risk assets.

To that end, inflation expectations are bombed out, and matter much more than Fed policy precisely because since QE3, Fed policy has not altered inflation expectations one bit.

Take a look below at the price ratio of the iShares Barclays TIPS Bond Fund ETF /zigman2/quotes/200600110/composite TIP -0.63%  relative to the PIMCO 7-15 Year U.S. Treasury Index ETF . As a reminder, a rising price ratio means the numerator/TIP is outperforming (up more/down less) the denominator/TENZ. A falling ratio means inflation expectations are dropping. Hard to imagine the Fed does much given how low the ratio has gone.

Stop caring about what the Fed does, and start caring about what they should be accomplishing. What is going to matter is the direction of oil which, in turn, would likely set the direction for inflation expectations more than what SuperYellen and the League of Extraordinary Banks decide.

On that point, as I mentioned in my last writing, there is a setup for a reflation-led melt-up not driven by interest rates, but driven by contrarian sentiment. That can matter much more than the endless debate over the manipulated cost of money in the near-term.

This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.

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