It's Time To Get Mad At The Fed

"Sometimes, you have to get angry to get things done."

- Ang Lee

US large-cap headline averages continued their on-going choppy sideways trend as small-caps (IWM) and emerging markets (EEM) faltered last week in a continuation of a pattern that has persisted for much of 2015. The average stock has not had a good year so far, with many in flat-out correction/bear market territory, something which is largely under-reported, while at the same time utilities and treasuries are performing quite strongly in the near-term.

The price behavior of Utilities (IDU) is quite important here. The utilities sector tends to be an early predictor of stock market volatility to come going all the way back to 1926. The fact that seemingly out of nowhere in the last few weeks the sector has outperformed the S&P 500 (SPY) at the same time everyone is endlessly debating if the Fed will raise rates in September suggests that there is a growing safe-haven bid underway in advance. As I argued on CNBC last week, we may be entering the third stage of deflation truth, making it hard for the Fed to not only try to raise rates in September, but also create an upward tightening trajectory.

For those that care about the fabric of society and capitalism, it's time to get mad. After creating the conditions which led to the financial crisis, the Federal Reserve arguably has left the future of the middle class in doubt. Indeed the gap between rich and poor has been a long trend in the making, but the actions of the last several years by central banks has exacerbated wealth concentration as interest rates and income repression favored asset holders, at the same time technology removed the bargaining power of employees to demand higher wages. The Fed with its continuous mixed messages ("well I think we should raise rates" one day, "inflation is still too low to raise rates" the next day) has encouraged a culture of short-termism on Wall Street, which has always been a problem but is even more so now.

The myopic behavior that the Fed has conditioned in money creates a dangerous backdrop. Inevitably, a large correction will occur, and the boom cycle will turn to bust. It is proven from numerous studies that nearly no-one achieves strong buy and hold returns precisely because of gut-feeling over trading and performance chasing in the short-term. So while stocks are at new highs, most of the middle-class likely is no where near feeling the same euphoria as headline averages are experiencing. The end result is a chase into a market that "feels" robust, but in reality is fragile. People get in now, a correction happens, they sell at the lows, and the wealth gap continues to widen because those who don't need the money in their investments simply wait it out.

This cycle is the problem long-term. The role of a trader/portfolio manager is not to care about what happens on a societal level, and simply "make money now," but no one should be hoping for a world where only a select few benefit from financial market stimulus. Such a backdrop ends up hurting more and more over the longer-term, inevitably impacting consumers who drive this economy. And while everyone may be distracted by downloading apps, streaming free music, and interacting on social media, the world around us which is dominated by central banks is only getting worse. That will become increasingly more evident if the current deflation pulse beats louder, a severe decline in equities occurs, and those with the least amount of investable assets panic out because they simply can't stand the volatility which the Fed has made people believe no longer exists.

Unrest assured — extreme volatility still exists, and we may be on the cusp of it.

Disclaimer: 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.