How Investors Should Connect the Fed’s ‘Dots’

I hate the Fed and all it stands for.

I despise the very existence of a quasi-governmental cabal that controls the money supply, and I hate the fact that most people have no clue how the Fed got started and what its real purpose is (to facilitate big government, finance wars and control the financial system). Just read G. Edward Griffin’s brilliant book, “The Creature from Jekyll Island,” and I promise you’ll never look at the Fed the same way again.

Of course, I don’t expect the Fed to go away anytime soon, and despite the valiant efforts of Ron Paul and other freedom advocates to audit the Fed, I doubt whether the Fed is ever going to be scrutinized the way it needs to be in order to see what, precisely, it holds on its books.

That said, what we can do as investors is take advantage of the conditions in the market created in large part by the central bank’s manipulation of the money supply and interest rates. Think of this as a case of “beating them at their own game.”

On Wednesday, March 19, the Fed acted as expected by announcing a taper of its bond-buying program. The Fed reduced its asset purchases by $10 billion per month to $55 billion. The Fed also dropped its previous threshold of a 6.5% unemployment rate as a trigger to prompt an interest rate hike.

During her first-ever press conference, Fed Chair Janet Yellen suggested that interest rates would start to rise sometime around six months after the end of quantitative easing (QE). Wall Street was already betting that QE would end later this year, and while I think predicting the end of QE that soon is dubious, if the conventional wisdom turns out to be accurate then the first interest rate hike in many years would be around April or May 2015.

The Yellen comments actually spooked traders, and the result was a sharp selloff in the stock market and the bond markets immediately after. And while this may have been a short-term overreaction to the Yellen hint on when rates would get turned up, all one has to do is effectively connect the “dots” to see the rising rate writing on the wall.

My friend and expert market watcher Tom Essaye, Editor of The 7:00’s Report, explained this concept of “dots” to me today like this:

“The projections of where individual members of the FOMC [Federal Open Market Committee] expect the Fed Funds rate to end each year is known as the ‘dots,’ and those ‘dots’ moved up decidedly in March compared to December. The latest FOMC release showed that 10 out of the 16 Fed officials believed the Fed Funds rate would be at or above 1% by the end of 2015. That compares with just seven back in December. That means the ‘dots’ are telling us that we will see at least one rate hike in 2015, and, logically, more than one.”

If this uptrend in the “dots” continues, it will effectively act as a long-term driver that will send market interest rates, i.e. yields on the 10-year Treasury note, much higher. And it is this bid that will keep bond prices trending lower (and bond yields higher) during the next year and well beyond.

For investors, this means either A) avoiding long-term Treasury bonds completely, or B) allocating at least some of your capital to an inverse Treasury bond fund such as the ProShares Short 20+ Year Treasury (TBF). This exchange-traded fund (ETF) is designed to deliver the inverse of the daily performance of the Barclays U.S. 20+ Year Treasury Bond Index, and that means it can make you money as the value of bonds fall and as interest rates (bond yields) rise.

So, if you want to get ahead of the trend and make some money, then start by connecting the “dots.”