Fed Mandate Has Shifted…

In 1978, the year I joined the Canadian investment industry as a trainee, I was sitting in a room full of seasoned brokers while studying for the licensing exams known as The Canadian Securities Course, when I directed a question to the group who were all totally consumed by a game of stud poker (and beer). “Who is the Chairman of the…” (glancing down at the reference materials) “err…Federal Reserve Board?” The brokers turned around and glared at me as if I were a compliance officer and then at each other as this esteemed group of “consummate investment professionals” struggled to produce answers. Not one of the group could muster even the slightest of guesses because back then, mired in a particularly nasty period of “performance anxiety”, these dudes were simply trying to survive the Stagflation Seventies, a period in which the two nasty bear markets ended (1969-1970 and 1973-1974) and gold rose from $35 per ounce to over $850 per ounce. To find an investment professional that could talk informatively about gold bullion was indeed a rarity but even rarer was to find anyone that traded equities who could name the Chairman of the Federal Reserve. To be fair, the bond traders were far more familiar with the Fed than were stock traders, because “common stocks” were the habitat of “commoners”, troglodyte gamblers and conventional boardroom etiquette considered it “poor form” to discuss anything to do with equity markets because real wealth found safety and respectability in fixed income (bonds). Every else was sacrilege.

Fast forward to 2022 and evidence springs eternal that the times have indeed changed. Instead of coming off eight years of financial malnutrition, the “wealth advisors” of the modern era are coming off thirteen years of financial gluttony, lavishly bestowed upon the elite classes by a Federal Reserve (and its other international central bank brethren) by way of zero interest rate policies, stimulus, direct intervention, and outright manipulation in order to maintain the behavioural benefits of “The Asymmetrical Wealth Effect” of rising stock prices on consumers. In fact, so very pivotal in the process has been the rise of the central banker in terms of prestige, power, and influence in the day-to-day performance of the major global stock averages that wealth advisors the world over have shrines in their office complexes paying homage to the likes of Bernanke, Draghi, Lagarde, and more recently, Jerome Powell. The burning of incense and the inflammation of candles as tributes to these canonized civil servants has grown to included charter member fan clubs. It has gone from the Spring of 1978 with gold at USD $124 per ounce when not one investment professional could name the Fed Chairman to the soon-to-be Spring of 2022 when even an Ethiopian cab driver can tell you the colour of Jay Powell’s tie on FOMC day. The heady days of shoeshine boys offering stock tips to then financier Joseph Kennedy have been replaced with Uber drivers commenting on FOMC policy initiatives.

As I sat here in my humble office overlooking the Scugog Swamp last Tuesday afternoon, I listened to the Jerome Powell tell the world how he and his central bank cohorts were going to once again save the world and as I watched this former Goldman stock peddler try his damnedest to replicate the benevolent grampa in an old 1930’s movie, I was taken from nauseous to cantankerous in a mere ten minutes.

What drives me batty is how these unelected purveyors of Wall Street paraphernalia and upper-class agendas are assigned such deference. If you look back to literally every major turning point since Paul Volcker stepped down, the Fed has committed countless policy errors and where they had the opportunity to at the very least withdraw stimulus to cool off an overheating stock or property market, they opted for bubble prolongment rather than price stability. I submit to those reading this missive that steps should be taken to end central banking. Since the Fed was created by the banks, continually acts for the banks, and is owned by the banks, steps should be taken to remove the function known as “Control of the Currency” from their powers. The debasement of the purchasing power of one’s savings or retirement funds should be a capital offense. Forget debt ceilings or the British North America Act; parliament should draw up a national referendum to constitutionally outlaw the monetization of sovereign debt. If that is deemed unrealistic or inexecutable, then take counterfeiting out of the criminal code and let citizens provide for themselves that which government can do unelected, unlegislated, and unabated.

I learned a long time ago that there arrives a point in every bull market where the prevailing narrative suddenly and for no apparent reason evaporates. For stocks, it is rarely how the Fed implements “policy” that affects the stock markets; it is frequently the manner in which they announce it that matters. Everything in the Powell statement last week was designed to placate the masses. It was intended to manage expectations of those holding stocks fearful of a too-hawkish agenda while assuaging the bond vigilantes fearful of a too-dovish agenda. The problem as I see it is that there is nothing that the Fed can do to tame inflationary pressures that will not adversely affect stocks. Similarly, there is nothing they can do to support equities that will not adversely affect inflationary expectations. Since the political winds have shifted to price stability from maximum full employment, stocks have smelled the pivot and are slowly metastasizing to “bear market mode”. This is where I am in portfolio construction for the balance of 2022.

If I sound overly-repetitive in my constant haranguing over Fed policy and stock market risk, I beg forgiveness but if there are two phrases overpopulating the social media world, they are “it is different this time” and “face-ripping melt-up”. Literally everyone thinks that Powell is going to do the classic 2017-2021 “stock market stick save” by taking the Fed Funds rate back to zero and launching another liquidity event. “He’s trapped!” they scream. “They (the Fed) backed themselves into a corner!” and “He won’t let stocks crash.” are the hymnal refrains we hear day in and day out from all of the internet pundits with their podcasts and their breathless summons to “Buy silver!”. IF the Fed mandate was still “maximum full employment” and not “price stability”, I might tend to agree but in his presser, Powell alluded to the “extremely strong economy in the fourth quarter” BUT nowhere did I hear the words “stimulus”, “accommodative”, or “transitory”.

So, my strategy is to remain bearish but flexible enough to do my own version of “pivot” the exact nanosecond that I hear any of the Fed rhetoric hinting at the crying of the word “uncle”, which surely could happen with the S&P at 2,409.31 (50% from the all-time high). My wager is that the current 7.3% haircut in the S&P will not suffice to even get the cap off the bottle of Jack that Jerome must be storing in the bottom drawer of his 800-pound mahogany desk with the gold-leaf hardware and state-of-the-art Bat phone to the White House.

Since I exited all leveraged gold and silver positions (one December tax-loss holding as well) over the March 7th and 8th span of trading, I have visibly anxious, having owned the Junior Gold Miner ETF (GDXJ:US) since last summer. That experience has been like trying to anchor my boat in a gale force wind; every time I think I am tucked in all safe and sound, another gust takes the vessel one hundred and eighty degrees from the intended spot. Here I am, flat and nervous, with no position in arguably the singular most positive environment in fifty years for gold and silver ownership. We are in a bonafide bull market in gold (and probably the same for silver) with conditions outrageously positive in terms of geopolitics, commodity prices, and sentiment so why am I out of a market that I consider the best value of any asset class on the planet?

It is, quite simply, because the precious metals are not behaving in a manner befitting their histories of five thousand years of value storage and insulation from currency debasement. As a veteran trader, I have learned to think, act and trade as if I am a hired gun for the bullion banks. In the process of fighting fire with fire, when the Twitterverse was absolutely screaming with every gold FinTwit taking victory laps as gold responded to Russia moving into the Ukraine, I determined that the bullion banks would want to lean heavily on the market in order to preserve market integrity and to discourage inflationary expectations and no better way than to crush gold – which they did. The day after I lost the gold and silver positions, gold got hammered from USD $2,078 to USD $1,980 in a March 9th orchestrated takedown that is precisely WHY I am leery of re-establishing the leveraged positions. Of course, I will buy them all back at some point because ever since I contracted gold “fever” in 1981 after my first major exploration success with the Hemlo discovery, my life has never been the same. Forty-two years later, I am still holding massive positions in junior gold and silver exploration and development issues on the assumption that the junior resource world is going to enter a period of tech and crypto-like speculation in 2022. Once the masses finally accept that the only bull market left is in gold, silver, and selected resources including copper, oil, and uranium, what is today a miniscule market cap for the sector will become a significant one and with that, enrich patient holders of quality names.

As for my volatility trade, (UVXY:US), the rebound in the S&P 500 which occurred last week has served to work off the overbought condition but since it went out a mere 90 points below the 61.8% Fibonacci retracement level, we could see a smattering of follow-through next week. However, working against that notion is the arrival of the fateful “Death Cross”, where the 50-dma knifed down through the 200-dma and as such has created a powerful sell signal. Needless to say, I am holding to the idea that the January Barometer’s sell signal will result in new lows for the market in the next few weeks thus taking volatility (the VIX) to new highs.

As the chart of the ten-year yield shown at the start of this missive demonstrates, we are in a full rate hike cycle with inflation, not maximum full employment (by way of rising stock prices), solidly in the crosshairs of the Fed policy bazooka. To be sure, they may be forced to pivot at some point to avoid a Depression, but not before a great deal of pain has been inflicted and that is why VOLATILITY remains a dominant theme for 2022.

Disclaimer: This letter makes no guarantee or warranty on the accuracy or completeness of the data provided. Nothing contained herein is intended or shall be deemed to be investment advice, implied or otherwise. This letter represents my views and replicates trades that I am making but nothing more than that. Always consult your registered advisor to assist you with your investments. I accept no liability for any loss arising from the use of the data contained on this letter. Options and junior mining stocks contain a high level of risk that may result in the loss of part or all invested capital and therefore are suitable for experienced and professional investors and traders only. One should be familiar with the risks involved in junior mining and options trading and we recommend consulting a financial adviser if you feel you do not understand the risks involved.

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