“If you’re at a poker table and you don’t see a sucker, it’s you.”
That quote is from Amarillo Slim Preston
, a professional gambler. It comes across tongue in cheek, but the wisdom is enormous.
Before there were internet based multiplayer video games, or the metaverse everyone is drooling about. The financial markets were the world’s largest multiplayer game.
Everyone from PHDs to brick layers have tried to crack the market code. Yet the list of superior investors is short.
What if we told you focusing on the most influential player could help you draft your way to victory?
Dollars to donuts you would be all ears.
The US economy and financial markets are the largest games in town. And the Federal Reserve is the game host and largest stack holder. They influence all aspects of the market and will always do so. That’s why you track what they say and do.
"Earnings don’t move the market; it’s the Federal Reserve board. And whatever I do, focus on central banks and focus on the movement of liquidity.” - Stanley Druckenmiller
If following the Federal Reserve is important for Stan - it should be important to you.
The Federal Reserve, in most circles, saved the global financial world from COVID-19. They used their unlimited chip stack (balance sheet) to buy assets when no one wanted them. Thus stopping the price plunge. From that point forward, the markets stabilized and rallied up until now.
So what does this all mean for 2022? A lot, dear readers!
The Federal Reserve has now stated that they are planning to reduce the size of their balance sheet in 2022. This news comes hot on the heels of the rapid inflation rise in the 2nd half of 2021, and the economy being on a solid footing. Given this, market participants have some to believe that the Fed may even raise rates in the coming quarters!
These moves will have a big impact on how the game will play moving forward, but how?
If the Federal Reserve is NOT buying assets any longer, then the largest buyer is out of the market. This allows financial markets to move toward “normal”. i.e. buyers and sellers drive asset prices.
In turn, interest rates on government backed securities should rise. And high flying stocks should pull back.
For example, the Dec 21 Federal Reserve meeting minute release suggested bond buying tapering and balance sheet runoff may come at a faster pace than expected. This pushed high flying tech stocks lower in price. See the chart of the Nasdaq below.