Because I'm TLT and I'll Win This Fight!

 | Jun 21, 2013 | 1:00 AM EDT
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Thirty years ago, legendary stock analyst Martin Zweig coined the phrase "Don't fight the Fed."

His basic meaning was very simple and targeted at equity investors. If the Fed is stimulating, stocks will rise and if they are doing the opposite, stocks will fall. Investors taking the opposing position with their equity allocation will get steamrolled. 

Since then, the term has been bastardized with multiple different nuances and applied to several other asset classes. In the past week we've probably witnessed another new application for the term, which is even more fundamental.

This past Monday, President Obama, in a television interview with PBS' Charlie Rose, said: "Well, I think Ben Bernanke's done an outstanding job. Ben Bernanke's a little bit like Bob Mueller, the head of the FBI, where he's already stayed a lot longer than he wanted or he was supposed to."

This kind of pointed commentary, offered publicly, coming from the president and directed toward the chairman of the Federal Reserve is unprecedented in my opinion, especially given that the economy is currently slowing, there are seven months before the chairman's current term is to end, and it was offered two days before an extraordinarily important decision on monetary policy.

Although I can't say for sure what the catalyst was for such a comment, I think it is reasonable to consider that there was a recent meeting between White House and Treasury officials with Federal Reserve officials where fiscal authorities demanded the current monetary stimulus to be continued.

The Fed probably pushed back against the political pressure, with the meeting ending with bad feelings all around. 

A similar event ocured in Japan last December with the election of Shinzo Abe as Prime Minister, who had run on a promise to pressure the Bank of Japan to increase stimulus. 

Soon after being elected, Abe met with BOJ Governor Masaaki Shirakawa and then told reporters: "I told him that I wanted an inflation target of 2% . . .  and to forge a policy accord with the BoJ to achieve that objective."

Shirakawa acquiesced to Abe's demand, moved the BOJ's inflation target to 2% from 1% and began a massive new quantitative easing program.

Obama and new Treasury Secretary Jack Lew may have decided to attempt to strong arm the Fed the same way. 

Although a strong argumument can be made that the BOJ efforts were too mild and that a new round of easing was appropriate, the same can't be made in the U.S.

The U.S. capital markets have been supported by Fed stimulus ever since the 2008 financial crisis, with little economic success and while legislative and executive authorities have done little to address with fiscal plans.

The monetary stimulus provided by the Fed was supposed to help bridge the economic underperformance by the private sector, especially the banks, and the fiscal gridlock, so that both could resolve their issues.

Instead, both the banks and federal authorities have used the monetary support to postpone addressing their problems. 

The White House now demanding even more monetary support is akin to your 30-year-old unemployed child, living in your basement rent free, complaining about there not being enough beer and Doritos when you arrive home after a hard day's work.

I think Bernanke's decided he's had enough of the gridlock on fiscal policy and the banks gaming the monetary support almost exclusively for putting on financial carry trades with little impact on economic activity, and has decided it's now time to pull the support for both.

As I read the Fed's policy statement on Wednesday and then watched the uncharacteristically serious Fed chairman's press conference, AC/DC's "TNT" was going through my head (with a slight letter alteration).

Regardless of the motivation for the Fed to signal the beginning of the end of the current round of QE, it has done so and with conviction. 

In the near term, the prudence of Zweig's words needs to be acknowledged by investors. The same monetary support that allowed equities and bonds to rise simultaneously, mostly by way of carry trades that have been steadily increasing for four years, is now set to be removed.

This will cause carries to be unwound and put upward pressure on U.S. Treasury yields for a long time.

Going long the iShares Barclays 20+ Year Treas Bond (TLT) is akin to fighting the Fed.

Don't do it.     

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