Explaining the FED pause with a meme

The art of turning complexity into simple decision-making. This comes with experience, a lot of risk, and little ego.

Sep 23, 2023

Welcome to MrGekkoWallSt's virtual office!

This is issue number 02 of my newsletter! This is where I organize and share my insights on the market, technical analysis, education, experiences, reflections, and the most relevant news of the period.

Reflection

One thing that always catches my attention: how people get apprehensive as the Federal Open Market Committee (FOMC) meeting of the Federal Reserve (Fed) approaches. Obviously, it's understandable, as we are in a restrictive scenario where the fastest interest rate hikes in the United States economy have occurred.

On the last Wednesday, September 20, 2023, the FOMC officially chose to pause interest rate hikes for the second consecutive meeting. As a result, the rate remains in the range of 5.25% to 5.50%. In edition 01, I reported that the market was already pricing in the continuation of the pause at around a 95% probability.

One of the main points I want to highlight in this edition is exactly one of the biases of human behavior that I feel has hindered me for a long time: The bias of thinking that you're wrong or that someone is deceiving you.

This type of behavior is quite common in the thoughts of those who don't exactly understand what they're dealing with, especially in individuals with a median IQ (Intelligence Quotient), which represents the largest portion of the world's population, and I include myself in this group.

If you've been dealing with cryptocurrencies for a longer time and tend to be an active user on Twitter, you've probably already come across this meme:

It may sound like a joke, but what I'm about to explain to you about this can change your perception of the market and some aspects of everyday life forever.

To continue, I need you to focus on three key points of this chart:

1 - The central character represents the level of 68% of people with an average IQ;

2 - The character on the left represents a lower percentage with low IQ;

3 - The character on the right represents a percentage equal to that of the left, or vice versa, but with a high IQ.

Relating this data to an investment decision, we can assess that the most likely scenarios would be:

68% of individuals would gather various information but become extremely indecisive to the point of not making any decision. What they fail to realize is that the act of not making a decision is already a decision in itself.
Right-leaning individuals with higher IQs would naturally possess the ability to make more logical and rational decisions, free from emotional influences from their surroundings.
Surprisingly, left-leaning individuals with lower IQs would make decisions similar to those on the right, who are more intelligence-endowed.

The bias of believing that you are wrong or that someone is deceiving you causes most people to value excessive complexity. For them, it is unacceptable for something to be a bit simpler. See the example I've constructed below:

Most likely, if you had the opportunity to ask these people directly why they believed that the rates would have to increase by another 0.50%, they wouldn't be able to provide a well-founded answer, or perhaps, not even know what to argue.

Meanwhile, the market itself, through the CME FedWatch Tool, which is the most well-known in sentiment analysis in this regard, was already indicating that the highest probability would be a pause.

Of course, there is always the reverse possibility, but we are discussing statistics and probabilities here. In only one instance throughout the timeline of the monetary tightening that began on March 16, 2022, did the CME FedWatch probabilities remain correct until days before the FOMC decision.

Only on June 15, 2022, was there a difference, a day when rates increased by 0.25% more than expected, as you can see in the table below:

Fed Interest Rate Decision - Investing.com

My goal was not to assert that CME FedWatch is an infallible tool, but to demonstrate that within the parameters I mentioned, historical data is better reflecting reality than anything else. In other words, simple information that many are overlooking, meeting after meeting of the FOMC.

The truth is that market manipulation does happen all the time. However, we have no control over it. It's essential to learn to focus on things that are truly controllable, which is yourself. To mitigate the negative effects of this, we need to be capable of gathering quality insights from various angles.

If the majority of them are pointing in the same direction, it might be best to believe in this perspective, even if you think you might be wrong.

If your homework has been done, there's no reason for regrets. Any future mistakes should be seen as learning and improvement for the next opportunity to refine your method.

In the future, I'll talk more about this. You can get ahead and take a look at this post on my website where I mentioned the 6 essential steps for a successful investment journey: https://www.gekkowallstreet.com/2023/09/navigating-with-confidence-6-essential.html.

Becoming capable of making confident decisions on your own is not an easy task. It will require a lot of study and practice; it's the only way to learn.

You will make mistakes along this journey, so it's crucial to have good risk management to survive in the market. Your biggest challenge will be learning to assess what constitutes quality insights, as the reality of the system we live in is deceptive.

A concept I carry with me is that the reality I perceive will never be exactly as it truly is. My goal is to try to get closer to this reality through my experience and the people I've learned to trust.

The right path leaves traces; it might be like closing your eyes and trying to follow a distant sound. You can sense where the sound is likely coming from and determine the direction you need to walk towards. If you've mapped the region, you'll have listed with you the dangers or shortcuts you might encounter along the way.

Now, do a quick exercise. Overlay this IQ chart and recall the decisions and indecisions you've had in the financial market or in your life. After reflection, leave a comment at the end with your conclusion; I'd like to know.

Be sure to subscribe to receive the upcoming issue number 03 next week.

Here are the topics I will cover:

A deeper dive into the S&P500 index and some probabilities through the end of 2023.
What the S&P500 Volatility Index (VIX) might be indicating regarding risk.
Current liquidity conditions through analysis of the Dollar Index (DXY) and the Fed's Overnight Reverse Repurchase Agreements (RRP) account.
Bitcoin's behavior after the FOMC meeting, which decided to keep interest rates in the range of 5.25% to 5.50%.

Relevant News

Macro Economy:

Cryptocurrencies:

Disclaimer: This is a newsletter, and I want to emphasize that I do not provide financial buying or selling recommendations, and I do not promise quick wealth. You should conduct your own analysis and decision-making. I believe that knowledge is the key to the financial market, and I am committed to sharing insights that can assist you on this journey. If you're not already following this newsletter, please consider subscribing. Every week, I share my analyses, experiences, and also the most relevant news of the week. Let's delve into the fundamentals, charts, and obtain the most valuable insights from the financial market!