It has been said the Fed will raise interest rates until something breaks. We might be close to that point. It seems there is some panic in the market. Perhaps a sick feeling in the stomach.
Over-view: it isn’t that interest rates are so high – it more likely that interest rates have risen so fast. This happened in 1987 Black Monday sell-off. In 1987, it was the fast increase in interest rates that spooked the market. Similar situation now. Interest rates have risen so fast that there has been no time for higher rate’s impact, to have its effect on the economy. So fast that we could see a hard stop in economic activity. So fast, it is crashing the economy well before the stats show up in “data dependent” economic reporting that the Fed says they follow. The Fed’s actions, we are told, are based on data dependent decisions, trailing indicators.
A wave of layoffs is sweeping the US. Here are the major companies that have announced cuts
Sept 20, 2022, Insider
That’s what starting to bother the market.
Raoul Pal in a recent interview is critical of Fed action saying things are breaking and that the Fed, while not lowering interest rates, will have to stop raising rates now or with one more hike. The damage is done already.
This Is About the Fed’s Volcker Worship, Maggy Lake Interviews Raoul Pal, September 23, 2022.
In the interview Pal, a Macro focused money manager, consultant and entrepreneur, shares where he is seeing cracks in the financial system at the international level.
- Strength in US Dollar is choking the currency market for the world’s largest manufactures. China, Japan, So Korea, Germany.
Mortgage Rates in the USA are 6.5%, approaching 7%. Mortgage demand is down by nearly 30% from the same time last year. “The monthly mortgage payment has increased about 60% compared to a year ago,” Nadia Evangelou. From linked story below.
‘Some companies are closing their doors; others are shutting down divisions’: Rocket CEO outlines plans to navigate the dramatic decline in mortgages. MSN Sept 24, 2022,
- Bond market volatility is greater than NASDAQ.
- Bond Market liquidity is as bad now as it was at the peak of the 2008 crisis.
- Have your shopping list ready. Everything has been thrown out. Bonds, Crypto, Growth & Commodities. Target what you want to own, what you can sell and not miss and what you want to buy more of. Pal provides his thoughts on what is on his list. US Treasuries, Crypto and Growth Stocks are on the list.
Pal’s conclusion is that what is happening, cannot continue for more than a few weeks and the Fed will be forced to pause. It is unlikely the Fed will reduce interest rates, but a pause will be as good as a reduction. In Pal’s words, the bond market is broken, and the Fed does not realize it yet.
We highly recommend watching this video to get a read on the equity and bond markets. Bottom-line from Pal, he believes we are in a panic mode and though highly volatile, feels a reversal is close at hand.
A follow-up on Pal’s interview, is a presentation in early September by Larry Williams.
LOTM sent this vid out previously, but it is worth watching again. Williams studies cycles and market action. William’s assumes news is created to explain the market action but the market repeats in cyclical patterns. Williams is forecasting a cycle bottom in early October and a rally into year-end.
Down, Then Up, Up & Away | Larry Williams, Sept 9, 2022
William’s, as the title suggests, believes the market will bottom in October and rally into year-end. There is a lot to gain from both the videos above. Williams is a short term trader while Pal is longer term holder of positions.
Our purpose is to calm concerns, create some hope and say there is an end to the market sell off.
Small actions you can take to give you a sense of control.
Look at your holdings and check for
- The smaller positions and the too large positions. Consider selling small positions that will not benefit you much in a market recover. House cleaning. If a position too big or is causing you nervousness, sell some. Sell the highest cost shares first for the loss. No harm in down sizing risk and coming back later. Beware the impact of the wash sale rules.
- Company survival is key. Hold your safest companies that have the highest rebound potential. Companies with low or no debt that have cash flow to support expenses. Tough decisions.
- Consider reducing the number of positions you hold and adding to the remaining positions. This follows the comments above where we sell smaller positions that will not impact the account up or down. There is logic behind this. If you do something – anything – you will free any fear based “frozen” emotions. Buy a three month treasury or one year treasury to do a trade you can live with. Emotionally it will free your critical thinking mind from your fight or flight emotional mind.
Sell highest risk positions and slowly add to “high conviction” ideas. This is a strategy Cathie Wood discusses in her approach to managing market correction. Cathie has often used the example that if she owns 50 positions in an ETF, she will sell 15 positions and add to her highest conviction positions. I have called this a “Circle the Wagons” approach after the wagon trains of the 1800 action to protect themselves from attack. Reduce your holding to the best and strongest positions. LOTM is still focused on inflation is the dominant theme of this decade. This correction is a pause in a bigger trend. Top descriptions are financially healthy commodity companies that pay dividends are good core positions to build around.
It appears we are in a panic stage. If so, then we don’t know when the bottom is or how deep the sell off. Don’t be afraid to buy but do so in a staged and methodical. Try to avoid big sweeping one of a kind actions (like selling everything) and make many small spread out actions. Usually when the market is in a panic selling stage, the selling climax is close at hand. These are generalities. No market action is exactly the same as the past.
Sharing my own situation and thoughts, are natural resource companies targets to add to at this period in time. Gold, silver, nickel, copper and natural gas are top of the list. Hydrogen (staying with energy) and some of Cathie Wood’s ARK ETFs are also considerations. ETFs and funds can be early buys as you avoid single company risk when buying ETFs and Funds. Investment timelines are important to keep in mind. Purchases now are done with a two to three-year holding period.
Best to us all.
Written September 25th, 2022, by Tom Linzmeier for Tom’s Blog at www.LivingOffTheMarket.com
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