Don't Fight the Fed. Front-Run the Fed.

Two driving forces

In the end, policymakers always print. That is because austerity causes more pain than benefit, big restructurings wipe out too much wealth too fast, and transfers of wealth from haves to have-nots don’t happen in sufficient size without revolutions. Also, printing money is not inflationary if the size and character of the money creation offsets the size and character of the credit contraction. It is simply negating deflation. In virtually all past deleveragings, policymakers had to discover this for themselves after they first tried other paths without satisfactory results. History has shown that those who did it quickly and well (like the US in 2008–09) have derived much better results than those who did it late (like the US in 1930–33).

There’s no better time than now to read Ray Dalio’s Principles for Navigating Big Debt Crises. The above excerpt succinctly illustrates what’s happening in markets around the world right now.

Two enormous forces are simultaneously pulling the market in opposite directions. A deflationary force caused by the recession. And an expansionary force coming from monetary and fiscal bazookas. How the market will perform over the next couple of years will largely be determined by how these two forces offset each other.

Obviously, this doesn’t mean that all markets will be up or all markets will be down. There are a multitude of battlefields, in each of which one of the forces can overwhelm the other. Bonds, equities, real estate, commodities, crypto, FX, and all the sub-categories, etc. This is why Ray Dalio specifically highlighted not only the “size”, but also the “character”, of the bazookas.

Who will win?

The Fed has gone through three phases. Phase one is when they got caught off-guard by the liquidity crunch in late February and early March. That was the best opportunity to “fight the Fed”.