THE MUST SEE CHART FOR PRUDENT INVESTORS ABOUT WHAT MATTERS THE MOST RIGHT NOW

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By Nigam Arora & Dr. Natasha Arora

To gain an edge, this is what you need to know today.

The Must See Chart

Please click here for a chart of the Fed funds rate going back to 1972.

Note the following:

  • The most important point for the markets right now is the terminal Fed rate.  The second most important is how fast the Fed gets to the terminal rate.
  • The chart shows the Fed funds rate at different times in history.  The take away from the chart is that there is a historical precedence for the terminal rate going much higher than what is discounted in stock prices right now.
  • The stock market is discounting a terminal rate of about 2.5%.  One big problem with the assumption about terminal rate by the market is that the Fed has already told us that the rate will be about 3% by the end of 2022 and 3.3% in 2023.
  • How good is the Fed at predictions?  As late as March, the Fed was indicating a terminal rate of 1.75%.   The Fed has jumped from 1.75% to 3.3% in a matter of three months.
  • Take a close look at the chart.  There is not insignificant probability of the terminal rate going to 4% – 5% if inflation does not cool.
  • If the Fed terminal rate goes to 4% – 5%, S&P 500 can easily fall below 3,000.  Before you get too concerned, it is important to understand that this is just one credible scenario.  There are many scenarios that would result in the stock market running up to S&P 500 level of 4,500.
  • Be very careful when listening to the talking heads in the media who claim to know what the terminal Fed rate will be.  Plus, Powell himself has told the world that the Fed with all of its intellectual horse power does not know what the terminal Fed rate will be.  The truth is that nobody knows.
  • There are two parts to inflation that we are seeing – supply constraints and demand.
  • There is nothing that the Fed can do about supply constraints.  The only thing that the Fed can do is reduce  demand.
  • In our analysis at The Arora Report, the supply constraints are likely to be resolved relatively soon.  The high frequency leading data that we are seeing at The Arora Report is showing that the Fed’s actions are already beginning to reduce  demand.
  • If it was not for the stickiness of wages and rents, our models could predict a terminal Fed funds rate and where the stock market is going with a fairly high probability.  However, we expect wages to be sticky.  They may not rise from here, but bosses are not likely to go to workers and ask them to take wage cuts to pay for the free money band wagon that our government was on for a long time.  We expect rents to continue to increase, but we expect home prices to fall.  The reason is that over the last two years, rents did not keep up with rising home prices.
  • There is another important element that may constrain the Fed – more than $30 trillion of national debt. If interest rates continue to rise, the government is not going to be able to make interest payments without causing severe pain for investors and those in the lower income group who depend on government programs.  All investors should consider listening to the very important podcast “Protect Yourself: The Dirty Secret Of The President And The Fed.”
  • The solution is not to get out of the market.  The Fed is talking about reducing future inflation.  They are not even talking about taking back a part of the inflation that has occurred over the last two years.  The fact is that your dollars have eroded by over 15% in real terms in the last two years.
  • To guard against erosion of the dollar, you have no choice but to invest.  
  • The solution is to become more knowledgeable and more nimble.
  • Powell is testifying before the Senate.  His testimony and Q&A may provide some insights into the terminal Fed funds rate and the speed of the hikes towards the terminal rate.
  • The biggest potential danger to your wealth if a prolonged period of stagflation.  This is why it is important for investors to become knowledgeable about stagflation.

Momo Crowd And Smart Money In Stocks

The momo crowd is 🔒 (To see the locked content, please take a 30 day free trial) stocks in the early trade.  There is angst about Powell’s testimony and fear of a recession.

Smart money is 🔒 in the early trade.

Gold

The momo crowd is 🔒 gold in the early trade.  Smart money is 🔒 in the early trade.

For longer-term, please see gold and silver ratings.

Oil

Oil is down about 4.5% as of this writing on recession fears and Biden proposing a federal gas tax holiday.  The federal tax on gas is $0.18 per gallon.  The proposal requires approval by Congress.

The momo crowd is 🔒 oil in the early trade.  Smart money is 🔒 oil in the early trade.

For longer-term, please see oil ratings.

Bitcoin

Bitcoin is range bound.

Markets

Our very, very short-term early stock market indicator is 🔒 because the market will depend on Powell’s testimony.  This indicator, with a great track record, is popular among long term investors to stay in tune with the market and among short term traders to independently undertake quick trades.

Interest rates are ticking down, and bonds are ticking up.

The dollar is stronger.

Trading futures is not recommended for most investors. The purpose of providing this information is to give an indication of the premarket activity that usually guides the activity when the market opens.

Gold futures are at $1840, silver futures are at $21.45, and oil futures are $104.78.

S&P 500 futures resistance levels are 3770, 3860 and 3950: support levels are 3630, 3600 and 3520.

 futures are down 308 points.

Protection Bands And What To Do Now?

It is important for investors to look ahead and not in the rearview mirror.

Consider continuing to hold existing positions. Based on individual risk preference, consider holding 🔒 in cash or treasury bills or allocated to short-term tactical trades; and short to medium-term hedges of 🔒, and short term hedges of 🔒. This is a good way to protect yourself and participate in the upside at the same time.

You can determine your protection bands by adding cash to hedges.  The high band of the protection is appropriate for those who are older or conservative. The low band of the protection is appropriate for those who are younger or aggressive.  If you do not hedge, the total cash level should be more than stated above but significantly less than cash plus hedges.

It is worth reminding that you cannot take advantage of new upcoming opportunities if you are not holding enough cash.  When adjusting hedge levels, consider adjusting partial stop quantities for stock positions (non ETF); consider using wider stops on remaining quantities and also allowing more room for high beta stocks.  High beta stocks are the ones that move more than the market.

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This post was just published on ZYX Buy Change Alert.

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Nigam Arora

Nigam Arora

Nigam Arora is known for his accurate stock market calls. Nigam is a distinguished master of the macro. He is a popular columnist with over 100 million page views, an engineer, and nuclear physicist by background. Nigam has founded two Inc. 500 fastest growing companies and has been involved in over 50 entrepreneurial ventures. He is the developer of Theory ZYX of Successful Change Management and is the author of the book on Theory ZYX, as well as the developer of the ZYX Change Method for Investing.

Dr. Natasha Arora

Dr. Natasha Arora

Dr. Natasha Arora has significant expertise in investment analysis especially biotech, healthcare, and technology. Natasha is a graduate of Harvard Medical School followed by a postdoc at MIT. She has published several peer reviewed research papers in top science journals.

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