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October 16, 2016

Thanks A Lot, Fed

Everybody and their brother curses the Fed, with good reason. They’ve essentially taken the “free” out of free markets – and there’s nothing that makes us, as investors, more uncertain or uncomfortable, right?

We know the Fed’s hand is heavier than ever… but what the hell are we supposed to do about it!?

Many of the experts we’re bringing to our 4th annual Irrational Economic Summit next week have strong opinions about the Fed. It’ll be well worth your time to hear what they have to say.

As I see it… the Fed is to blame for the next financial crisis (whatever shape that may take, and whenever it should finally appear).

But instead of crying about it, I’m more concerned with profiting off the Fed’s intervention.

You see, you essentially have two choices heading into the next global financial crisis.

You could do exactly what you did ahead of the last global financial crisis, in 2008.

Or, you can arm yourself with a far-superior survival strategy – one that capitalizes on central bank intervention.

Mind you… I don’t actually know what you did ahead of 2008. And I don’t know exactly how you fared through that confusing, tumultuous period.

But I know what the majority of “typical” investors did, and I know that if they had used my survival strategy… well, they’d be a lot richer (and happier) today.

Let me show you what I mean…

This chart shows the power of the survival strategy I’m talking about. Take a good look at it, then I’ll explain how this strategy exploits a Fed-driven phenomenon – one that I spoke about publicly at our Irrational Economic Summits, in both 2014 and 2015.

A $10,000 investment in the S&P 500, made in August 2007, is now worth about $14,500 – a total return of 45%. But you only got this return if you were willing to sit through a 53% drawdown!

Meanwhile, a $10,000 investment using my survival strategy is now worth around $19,000 – a 90% total return. And you could have gotten there quite smoothly, never losing more than 5% of your initial investment.

Which would you rather have?

A 90% return, while suffering a 5% drawdown?

Or a 45% return, after suffering a 53% drawdown?

It’s a pretty obvious choice, I think!

Clearly, my survival strategy is able to weather the storm better than a passive investment in the stock market… it’s able to generate stronger returns, with less volatility, over the long run.

That’s all thanks to the Fed (not despite them)!

You see, the Fed is now on a course of raising interest rates. And they’re doing it while almost every other central bank in the world is lowering interest rates.

This is precisely the “central bank policy divergence” that I began speaking about at our Irrational Economic Summit in 2014. I knew the day would come… and now that day is here!

What’s more, I knew back in 2014 that this divergence in global monetary policy would likely have two effects.

It would confuse the snot out of people, for one. And it would set stock markets around the world on divergent paths – creating a wide spread between the “big winners” and “big losers.”

It took a while for this theme to fully develop. But consider where we are today…

Over the last quarter, the best-performing stock market in the world is up 24%. And the worst-performing stock market is up just 3%. That’s a fairly large spread, at 21%.

The spread between top- and bottom-performing global stock markets is being driven by the divergent policy actions of central banks around the world. And my research shows this metric is a predictive indicator for how risk-on and risk-off markets will perform.

Courtesy of Adam O'Dell, Economy and Markets 

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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