Feb. 11, 2022

Playing The Fed.

If Wall Street were a football team it would be the home of the broken field runners. Find that opening, and run as fast as you can for the end zone.

Of course, the Street has always been this way. It's in their blood. Find an advantage, and an extra measure of profit, and go for it.

But since the emergence of the Pandemic, this basic instinct has taken on a new dimension. I suppose that at least part of that is a reflection of the increasing power and influence that the “powers that be” the Federal Reserve and the US Treasury have taken in managing the crisis.

I think today it's fair to say that the game now revolves in anticipating the next step of Treasury, and particularly of the Fed.

So, let's review the past 24 months, and see exactly how this game of Covid Fed has worked.

Initially came word that a new, novel Corona Virus had emerged and that reports out of China, at least, were that it was highly infectious and potentially lethal.

That was enough to begin a cascade of government actions, designed to curtail the spread of the virus. From the wearing of masks to social distancing, to self-quarantine, and finally to the closing of the “non-essential” businesses. The economic effects became direr.

By that second quarter of 2020, the economy was in full free-fall. With business activity around the country declining at levels last seen during the Great Depression of the 1930s, 90 years before.

Catastrophic times require unprecedented action from the nation's monetary authorities.

And that's just what we got. Action by the Fed and Treasury the likes of which we've never seen before.

The nation's coffers were literally thrown open. And the money flowed out of Washington like there was no tomorrow. Stimulus checks to anyone who had paid taxes. Stimulus to big businesses to keep them operational. The credit was widely available and next to no interest.

It's a funny thing, when you pump that much money into the financial systems, it begins to look like everything is OK. The top-line numbers, like the nation's Gross Domestic Product rise. People begin to spend those stimulus dollars, and the country seems to be back on track.

But best of all Wall Street is very very happy. You see all those extra dollars floating around found a ready home on the Street. And markets returned to normal, just 7 months after they crashed. Next to 1987, it was the fastest bear market in history. Crash in March, recover by September.

Who would have ever thought this was possible?

Answer. Those on Wall Street who were shrewd enough to “Play The Fed.” Those “open field runners,” who we talked about earlier.

You see many on the Street had anticipated that the Federal Reserve would be called upon to literally open up the gates and flood the system with federal reserve notes.

And those that we're able to anticipate the Fed, profited handsomely. As we've seen in the latest surveys, the nation's wealthiest, got wealthier.

Yesterday we saw an all-new chapter in the Play the Fed Game. Inflation has taken come to the 50-yard line. I dare say, there's hardly a person in this country who doesn't know that we are caught in the grip of runaway inflation.

So all eyes are now focused on the one player who will be asked to meet the challenger. That's right the Fed. And after yesterday's CPI Print at 7.5%, the Street is absolutely convinced that the Fed will raise interest rates when they meet next on March 15-16.

What's more, I believe that we began to see just how the Street will react, when they showed some of their hand yesterday.

First, we saw bonds, as expected were sold. So too were many of those highly leveraged stocks, that will now need to support higher interest burdens on their debt. All those stock buyback programs don't look so good right now.

Interestingly bank stocks rallied. The good news for them is that rates are rising. And so too are interest rate spreads. The primary profit center for most banks.

All of that was pretty predictable.

There was one area that was not at all predictable, at least from my perspective. Many inflation-sensitive commodities behaved as if inflation will continue.

Past any interest rate move by the Fed. Oil, lumber, silver, and copper all up on the day. Admittedly gold, a prime indicator of future inflation was down.

But to have so many of these other inflation-sensitive commodities higher on the day indicates to me that there is less confidence in the Fed's next move than we'd like to think.

Whichever way things go, we know one thing Watson. The game's afoot. And the player we're all watching is the Federal Reserve.