Has The Fed Finally Lost Control Of US Interest Rates?

By: Avi_Gilburt

Back in the 1940’s, Ralph Nelson Elliott once noted:

At best, news is the tardy recognition of forces that have already been at work for some time and is startling only to those unaware of the trend.

So, rather than be startled by the news of the past week, I have been trying to warn anyone who was willing to listen that if you want to know what the Fed is going to do, simply read the bond charts. You see, the Fed does not lead the market. Rather, the Fed follows the market. And, the market told me back in late 2018 that the Fed is about to fall behind the market.

Yet, almost every single person who reads this article will think I am crazy for saying something so ridiculous. Right? But, that is why I was prepared for the action seen in the bond market this past week, and not shocked as most participants seemed to be. In fact, one of my subscribers laughingly posted an article in our chatroom entitled "Riding the Bond Rally No One Saw Coming," while noting how our members were certainly quite prepared for this rally in the bond market.

Well, for those that wear comfortable blinders and do not want to see the truth, this article I penned not too long ago may be tough for you to read. Yet, for those with an open mind to the actual facts of market history, it will likely be enlightening.

Not only have I outlined the facts that the Fed has no control over the markets in the listed article, I have also outlined that one can know what the Fed is going to do well before they do it. All you need to do is follow the bond market and you will know what the Fed will eventually do. The bond market always leads Fed action. You may even call the bond market a leading indicator for the Fed.

As you likely read in that article, this allowed me to buy TLT at just below 113 despite everyone telling me I was simply crazy “because the Fed is still raising rates.” Most were simply astounded that I would be so bold as to “fight the Fed.”

I would imagine this being akin to when I suggested that gold was going to top out at $1,915 despite the pervasive certainty at the time that gold was going to easily eclipse $2,000. (By the way, gold topped out at $1,921). Or, maybe it was akin to when I pounded the table to the long side in 2016, looking for the market to rally over 2600SPX when we were down in the 1800 region, and then reiterated that expectation as we went into the election, while noting “it does not make a difference who is elected.”

Again, many of these turning points are telegraphed by the market action, and, as Elliott noted, is only surprising to those who are “unaware of the trend.”

As you can see from the charts in the article above, my expectation was that TLT would rally from the lows of 2018 to the 124 region before it takes a respite, eventually on its way to at least the 128 region, but with a more ideal target in the 131-136 region.

At the time, many were aghast at my chutzpah to even consider to be long bonds while the Fed was still raising rates. And, when I reiterated my expectations last week that we are again on the verge of another strong rally in TLT, I was faced with similar types of comments:

“At a time when stocks rally strongly, you call for SPX to drop to 2200, and now you want people to go for bonds?”

“Rates are headed higher. Treasury is a bear. I am on the opposite side of this one.”
“I think you have sentiment wrong on bonds this time . . . I think you are going to see a significant steepening of the yield curve in 2019, and this is going to send TLT much lower . . .”

And, two of these quotes came from those who view themselves as professionals in the market. But, professionals are not immune to the herding effects of pervasive market sentiment.

In 1996, Robert Olson published a study in the Financial Analysts Journal in which he studied the effects of herding upon “expert” fundamental analysts’ predictions of corporate earnings. After studying 4000 corporate earnings estimates, he arrived at the following conclusion:

'Experts' earnings predictions exhibit positive bias and disappointing accuracy. These shortcomings are usually attributed to some combination of incomplete knowledge, incompetence, and/or misrepresentation.

However, if you would like to read some truly excellent work on the fundamentals of the bond market which accompanied this rally, I suggest reading Eric Basmajian with whom I am proud to work at FATrader.com: Bonds Are Saying Something - We Should Be Listening: Part II.

Well, for those that follow my work, you would know that I called for the top to the bond market back in 2016, and then called for the bottom back at the end of 2018. At this time, I still see TLT rallying to at least the 128 region, with potential to rally as high as the 131-136 region, depending upon the structure we develop over the coming weeks.

Alternatively, a break down below 123 could suggest I am wrong in this assessment. And, since my first position was bought at just under 113, we are basically playing with house money at this time. We will continually raise our stops based upon the structure of the market as we move higher, and eventually take our profits at our targets.

In conclusion, and to answer the question in the headline of the article, the Fed never had control. The market is in control and the Fed simply follows the market. To believe otherwise will continually get you whipsawed at the turning points, just as the Fed continues to get whipsawed by the market.

Avi Gilburt is a widely followed Elliott Wave analyst and founder of ElliottWaveTrader.net, a live trading room featuring his analysis on the S&P 500, precious metals, oil & USD, plus a team of analysts covering a range of other markets. He recently founded FATRADER.com, a live forum featuring some of the top fundamental analysts online today to showcase research and elevate discussion for traders & investors interested in fundamental rather than technical analysis.

© 2019 Copyright Avi Gilburt - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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