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What is Fed's 'army of Robinhood traders' buying next? Is it gold?

Kitco News

(Kitco News) - Of all the forces of the market today, none are still as strong as actions taken by the Federal Reserve, whose purchasing activity could be likened to that of a day trader’s, said Ryan Giannotto, director of research at GraniteShares.

"I would even go as far to say as Powell is 99% of explaining returns in this market," he said.

Assets purchased by the Fed has expanded in scope, from traditionally-held assets like real estate, which have been acquired since Quantitative Easing (QE) 3, to now commercial paper and corporate debt, Giannotto noted.

"I'd like to say that the Fed has now turned into basically just an army of Robinhood traders. It's a very, very humorous image to see the Federal Reserve board sitting around on their smartphones, buying and selling LQD [iShares iBoxx $ Investment Grade Corporate Bond ETF] on their Robinhood accounts, but that's exactly what the Fed has turned into," he said.

Gold, however, remains one asset that the Fed has yet to "bail out," Giannotto noted.

"What will be the next asset Powell buys? That's the question that's driving the markets higher," he said.

The Fed's purchasing decisions have even more sway on investors than the ongoing COVID pandemic, which is seeing a resurgence of new cases in the U.S. in what is referred to as a second wave.

"In terms of COVID it's a very interesting situation because what matters less is not the facts on the ground but more so the public perception, and that's really hard to game out here as we proceed into school and go into fall," he said. "It's not hard, cold data that make the decision, it's public perception."

Giannotto noted that another government mandated shutdown of the economy is highly unlikely at this time, even as COVID cases are rising in the U.S.

"At this point, the economic policy of top-down lockdown is not feasible, it's no longer possible, unless governments are willing to force it with the police or the military, it's not going to happen," he said. "If we did see top-down policy of mass quarantine again, the leading economic activity of New York City, in the financial district, would be hunting for deer. We would be back to the stone age."

Additionally, the economic data that is being reported is not accurately depicting the true gravity of the pandemic-induced fallout.

"I am very skeptical of the official job numbers put out. I just think the magnitude of what's going on, in terms of the velocity of job gains and losses, is orders of magnitude beyond what they are prepared to calculate," he said. "We've seen a whole market cycle in a couple of weeks."

A gloomy economic outlook may be good news for risk assets, however, as equities strength and economic weakness are now negatively correlated, Giannotto said.

"The gloomier the long-term prospects, the higher asset prices will go, because it just means [Fed Chair Jerome] Powell will have to dig in deeper," he said.

Giannotto said that the pandemic has amplified the need for investors to buy gold, an asset whose three main characteristics make it an attractive investment: use as a safe haven asset, ability to diversify portfolio, and ability to hedge against the U.S. dollar.

The pandemic has exposed weaknesses in industries that are vulnerable to a negative demand shock, Giannotto added, and investors should avoid such sectors that are set for "long-term impairment."

"The energy sector, in particular, is really ground zero from this movement. Really, as you said, subject to a critical demand shock. It's really difficult to see how the energy sector will ever regain its prominence," he said. "Exxon [was] the largest company by market cap, and actually in the last nine months, it's been the single largest destructor of shareholder wealth."

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