Martin Pelletier: Don’t bet your wealth on Federal Reserve policy

financialpost.com:

As 2024 has officially come to a close, investors have a lot to be thankful for, with equity markets continuing to surprise to the upside, providing a second year of solid gains.

It certainly made for an interesting 12 months, with the United States Federal Reserve cutting rates and yet long-term U.S. bond yields holding steady.

At the same time, there was a massive amount of liquidity pumped into the market via the reduction in the Fed’s reverse repo account (RRP). In particular, U.S. money supply grew 3.7 per cent over the last year, the biggest yearly increase since August 2022.

Monetary liquidity has played a crucial role in supporting the equity markets ever since quantitative easing emerged after the 2008 financial crisis. More money in the system directly increases the demand for risk assets driving prices higher while inexpensive capital allows companies to financially engineer growth via share buybacks.

Meanwhile, you now have Elon Musk and president-elect Donald Trump pumping up crypto, alluding to its potential role in the U.S. Treasury. Crypto is the ultimate risk trade, given it performs akin to a levered-beta asset (essentially a security that has more volatility in returns than the broader market).

We do worry that this has turned a lot of investors into speculators, and Wall Street has been more than happy to comply by providing a growing number of niche, high-risk vehicles. For example, ProShares filed for approval of exchange-traded funds (ETFs) that track the S&P 500 and Nasdaq-100 denominated in bitcoin, meaning they will be taking a long position in underlying stocks then a short U.S. dollar and long bitcoin position using futures.

The big question is if all of this can continue in 2025. We do worry