Is The Fed On The Precipice Of Another Major Policy Mistake?

Darius recently hosted Unlimited Funds CEO Bob Elliot on this month’s 42 Macro Pro to Pro, where they unpacked the Fed’s asymmetrically dovish reaction function, the impact of the work-from-home phenomenon, their systematic approaches to investing, and more.

If you missed the interview, here are the three most important takeaways from the conversation that have significant implications for your portfolio: 

1. What Is Driving the Fed’s Expansionary Monetary Policy?

We authored our “Resilient U.S. Economy” theme in September 2022, and since then, we have identified a new contributing pillar: the continuation of expansionary monetary policy. 

We believe this policy direction is puzzling, driven largely by the Fed’s belief that no further cooling in the labor market is needed to achieve 2% inflation—a stance we view as highly likely to be inaccurate. Nevertheless, it remains the Fed’s current perspective.

Bob Elliot offered an insightful take on this issue, suggesting that the Fed’s position likely stems from a fundamental disconnect between how academics interpret markets and models versus how practitioners do. This divergence may explain their controversial outlook on the labor market’s role in achieving their desired inflation target.

2. How Is The Work-From-Home Phenomenon Affecting Labor Market Dynamics?

At 42 Macro, we monitor various workforce dynamics metrics, including Nonfarm Productivity Growth and the Private Sector Quits Rate. Our analysis shows that Productivity Growth is currently above trend, while the Private-Sector Quits Rate has declined significantly from its elevated levels over the past couple of years.

We believe this shift toward longer employee tenures is likely a key driver behind the current above-trend rate of productivity growth, as longer retention generally leads to greater employee efficiency. This increased productivity is helping to offset some of the inflationary pressures stemming from higher wages and income growth, and we believe it is likely to persist.

Additionally, the rise of remote work plays a significant role in this dynamic. With the flexibility to live and work from virtually anywhere, employees are more likely to stay with their current employers, further contributing to lower turnover and increased productivity. 

3. Why Did We Replace Core Fixed-Income Exposure with Gold in Our KISS Portfolio?

One of the recent adjustments we made in our systematic KISS Portfolio Construction Process was to replace our core fixed-income exposure with gold. This decision reflects our understanding that if our Investing During A Fourth Turning Regime analysis proves true over the long term, it is highly unlikely that bonds will outperform other assets on a real, risk-adjusted basis.

While we recognize that no one—including us—is ever 100% correct on their fundamental views, even partial accuracy in our predictions suggests a strong likelihood that assets like gold, Bitcoin, stocks, and real estate will prove to be far better hedges against accelerated monetary debasement and financial repression than bonds. Indeed, we expect monetary debasement and financial repression to be tools that the Fed employs to address the challenges of excessive sovereign debt and a robust economy that leaves little incentive for buyers of government bonds.

Given this dynamic, we pivoted entirely out of core fixed-income exposure and allocated that portion of our systematic KISS Portfolio Construction Process to gold in October. Our 60/30/10 trend-following strategy now features maximum allocations of 60% stocks, 30% gold, and 10% Bitcoin.

Since our bullish pivot in November 2023, the QQQs have surged 37%. Momentum $MTUM is up +48% and Bitcoin is up +169%.

If you have fallen victim to bear porn and missed part—or all—of this rally, it’s time to explore how our KISS Portfolio Construction Process or Discretionary Risk Management Overlay aka “Dr. Mo” will keep your portfolio on the right side of market risk going forward.

Thousands of investors around the world confidently make smarter investment decisions using our clear, accurate, and affordable signals—and as a result, they make more money.

If you are ready to learn more about how our clients incorporate macro into their investment process and how you can do the same, we invite you to watch our complimentary 3-part macro masterclass. 

No catch, just macro insights to help you grow your portfolio—our way of saying thanks for being part of our global #Team42 community of thoughtful investors.