Don’t fight the Fed

Posted By Darren Winters on May 23, 2020


Don’t fight the Fed

Could the no-nonsense investment advice of late Marty Zweig, “don’t fight the Fed,” help investors and traders navigate these treacherous markets.

Zweig had a simple investment philosophy, “don’t fight the Fed”

For those following that advice there was a pot of wealth to be gained by participating in the Fed-induced stock bull market, which followed the financial crisis of 2008 and the Great Recession.

Don’t fight the Fed investing mantra is about the continuation of the status quo

Don't fight the Fed

A capitalist system that rewards those who invest, additionally it encourages aspiring wealth creators to borrow to do so. Businesses, in their endeavor to make profits, employ the factors of production, land, labor, capital and without the latter the system grinds to a halt. 

So the apex of the capitalist system’s food chain is the private shareholders’ of the Federal Reserve for they own the copyrights to the world’s most valuable brand, the US dollar. 

Global foreign US dollar-denominated loans generate member banks and shareholders tens of billions of US dollars a year in interest payments. 

The US dollar is the world’s reserve currency, most of the world’s commodities are priced in US dollars, moreover, the world’s reserve currency foreign borrowing, also denominated in US dollars, hit a record high in 2019.

Emerging economies now have had a record of $3.74 trillion in dollar debt, according to the BIS data. 

Is Zweig’s advice, given during the 2008 financial crisis, “don’t fight the Fed,” and echoed by countless other investors still relevant to today?

Monetary conditions exert an enormous influence on stock prices” wrote Zweig in his book entitled “Winning on Wall Street” in the mid-eighties when the Fed fund rates were above 10%

Several decades later, with the Fed rates following a downward trajectory to zero, which some participants say could go negative “don’t fight the Fed” sounds exhausted

“The Fed has no more ammunition left,” said Richard Fisher, the former Dallas Fed president in 2016.

The resilience and stability of the US dollar could still be why the “don’t fight the Fed,” mantra still holds water today

As the global economy weakens and other currencies meltdown capital flows

into the US dollar and US dollar assets strengthen. The US dollar index (DXY) remains near the 100 level and shows no signs of weakening. What’s more demand for US treasuries is buoyant and that is no surprise in a world where $15 trillion, or 25% of the market has a negative yield and where the stock dividend drought shows no signs of abating. I am not surprised investors are showing strong demand for the newest 20-year treasuries despite the ballooning US deficit.

Put simply, while the US dollar remains the world’s kingpin the US government can keep borrowing as global investors eagerly snap up a scarcity of prime income yielding collateral debt. 

Until there is no rival to the US dollar hegemony, which is propped up by US treasuries, the petrodollar, and the US military “don’t fight the Fed mantra still holds. 

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