The Fed’s Win Rate is Still Near Zero

I’m excited for the new year for many reasons but I’m also thankful for a great 2017. Since this issue of Economy and Markets will be my final one of the year, I thought it fitting to review this year and look ahead to the next.

As my Treasury Profits Accelerator subscribers already know, long-term forecasts aren’t what I usually do. My system identifies overreactions in the long-term Treasury market and when a trade happens, we’re in them for less than two weeks. Trades are triggered by my proprietary algorithm and not subjective analysis.

My track record in those short-term trades in 2017 was 80%. Overall I expect a winning percentage of about 70%. So 2017 was indeed a good year!

Throughout the last 12 months, long-term Treasury rates fluctuated between a high of 3.19% in mid-March to a low of just under 2.68% in September.

As it did in stocks, volatility declined in the Treasury bond market significantly. That’s a problem for options strategies like mine. If prices don’t move, option premium values decline. Even though my winning percentage was excellent, low volatility hurt performance because the “snap-back” overreactions weren’t as significant as they normally would with higher volatility, thus triple-digit gains were nonexistent.

Federal Reserve policymakers say they’re planning on maintaining steadily increasing interest rate policy, or normalizing, based on current projections.

And let’s be realistic, the Fed is usually wrong when it comes to forecasting. I’m not talking policy forecasts, but economic forecasts. Decision-makers will likely be forced to change course at some point in 2018.

Fed members projected a 2% inflation rate since the beginning of the recovery back in 2009 and we’re still not there. They’ve recently admitted that they’re confused about what drives inflation.

Going back five years, median Fed GDP projections were in the 3% range and moving higher after 2013. Of course those forecasts were adjusted lower every year through this year. On an annual basis, the U.S. economy hasn’t grown by 2.5% since before the financial crisis in 2007.

The scary thing about Fed projections are that policymakers truly believe their decisions actually drive our economic growth, inflation, jobs, spending, and borrowing. So for the central bankers who inflate our money away, tinker with quantitative easing, and manipulate interest rates with the expectation of certain outcomes, they have failed.

I’m amazed that the Fed has hundreds of Ph.D.’s researching, analyzing, and forecasting with such a miserable result.

My system has a win rate in the neighborhood of 70%. The Fed’s win rate on its forecasts are near zero.

I can give an opinion on where the economy is going based on my analysis but, for my readers, it really doesn’t matter. I trade on high probability outcomes because of overreactions and position for a short-term reversal.

And unlike my system, my long-term forecast is based on my fundamental analysis which is more of an educated guess.

OK, enough with the disclaimers…

I expect that volatility in the Treasury market will increase in 2018 for a few reasons. But primarily because of one big one.

Global sovereign bond markets have been manipulated by central banks for years and in 2018 we’ll see both the European central bank and the Bank of Japan start to slow down or even reverse stimulation programs. When that happens, investors will be quick to sell and whatever the Fed does won’t matter. U.S. Treasury bond prices will go lower and yields will jump.

I expect long-term Treasury yields to hit 4% in 2018 and the currently flat yield curve, to steepen significantly.

Now, before that happens, we could see the yield curve flatten more or even invert. Usually when the yield curve inverts (meaning that long-term yields are lower than short-term yields), we’re in a recession.

That’ll spook stock investors and likely trigger a major selloff. I believe we’ll see a major selloff in both stocks and bonds, which is unusual because money from stock sales usually move to the safety of Treasurys. Volatility will spike across the board when that happens.

You can prepare and profit from surprises in the financial markets, and specifically in the Treasury bond market, with Treasury Profits Accelerator. Click here to learnrn more.

Happy Holidays!

Lance Gaitan

Editor, Treasury Profits Accelerator 

Lance Gaitan

Lance has a unique ability to find big gains in the most boring of market. He manages to turn sleeping giants into a monster gain-makers – some of the most profitable investment opportunities of a lifetime.