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The extent of a market correction all depends on the Fed: Opimas CEO

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Octavio Marenzi, Opimas CEO, joins Yahoo Finance to discuss the likelihood of a market correction and outlook on the Fed.

Video Transcript

- I want to continue our markets conversation now and bring in Octavio Marenzi. He is CEO at Optimas. Octavio, always good to see you. I'm going to put to you the question I put to our other market strategists in the previous hour. Is there a market correction coming? And just how bad do you think it's going to be?

OCTAVIO MARENZI: Well, I think, there's looking-- the balance, the risks look like there is going to be a market correction. And the question is now, how bad will it be? And I think it all depends on the Fed. I think the only game in town here really is the Fed, and its monetary policy, and the amount of cash they've been pumping into the markets.

They have been pumping $120 billion a month into the markets, $80 billion worth of treasuries, $40 billion worth of mortgage backed securities. It doesn't look like they're going to slow down on that anytime soon. I had thought, if you'd asked me a few weeks ago, I would have thought at the end of August, they were probably going to announce some sort of tapering with a Jackson Hole meeting, where they get together and discuss these kinds of things. But it looks like that's not going to happen now.

So Jay Powell was very hesitant to commit to doing that. And I think the guy is scared. I think when he took over as head of the Fed back in 2018, the market took a nasty dip as a result of the Fed trying to increase interest rates. And it doesn't want to repeat that.

So I think he's very, very worried about increasing interest rates. But if he does, if he does actually start to taper, I think the markets are going to have a conundrum. And they're going to drop by at least 20%, 25%. So I don't think that's going to happen. But if the Fed does increase interest rates and pull back, rein back in its very, very loose monetary policy, we're going to see a severe correction.

- So do you think then that this market has not started to price in the Fed pulling back on those bond purchases and raising interest rates? I mean, I think you disagreed with me not long ago, Octavio, about the Fed being transparent. I thought they were being pretty transparent about what it was they were planning to do. Do you really think that this is going to come as a surprise to the market, we would have such an aggressive move to the downside?

OCTAVIO MARENZI: No, I think you're right. So what we are seeing is that a lot of prices starting to look like they are factoring in a return to normality. So we've seen the stock market, basically, on hold since early September. We've seen the price of gold come down. We've seen the dollar go up. These are all indications that monetary policy is going to have a change, there's going to be some sort of change.

But so far, what's been priced in is almost sort of homeopathic in terms of the dosage, I think. So it's very, very limited moves. And I think if they do increase the interest rates severely and harder, some sections are going to have to do that. And we don't know when that's going to be, it's really up to Jay Powell and his cohorts of the Fed in terms of when they do that.

When they do come around to doing that, the market is going to react very, very badly. But I think he's going to push them into the future as far as possible. But I think the market is starting to say, it looks like it is going to happen at some stage and we are sort of starting to price that in a bit. But so far, what's been priced in is very, very limited, a very, very limited move in his part.

So maybe, he'll go from saying, we're doing $120 billion a month to $110 billion a month. And that might be the kind of change that he announces. But if it's anything much more than that, I think the markets will respond very, very badly indeed.

- Do you foresee that being a long, drawn out response from the market or might it be more of a knee jerk reaction? You know, the market will catch its breath. And then, we'll resume the rally we continue to see here.

OCTAVIO MARENZI: Well, I think that's probably what's going to happen. So the Fed might try to increase interest rates and everyone will dive for the doors at the same time. It's a bit like a game of musical chairs, where no one wants to be the last person without a seat and everyone will jump at the same time. So I think the reaction will be quite silly because everyone is watching the Fed now, everyone is looking at what is the Fed going to do next.

I think in previous downturns and recessions like this, not everyone was taking into account exactly what the Fed was doing, wasn't really the thing that was top of mind. This time around, it is. So as soon as the Fed makes that move, everyone's going to run for the doors. And there'll be a severe market contraction.

I think the Fed will then turn around and say, Oh, we didn't mean to do that. We're going to loosen interest rates again and lower the-- pump as much liquidity back into the market to bring it up. Just like they did in 2018 and they've done repeatedly now in little doses. So I think that's the game we're going to see is sort of a correction and then the Fed jumps back in and says, Oh, no, we didn't mean to do that. We apologize and we're going to pump money back in.

- Right. But I mean, is it the Fed's job to worry about how the market's going to react to its monetary policy?

OCTAVIO MARENZI: I didn't think so. But it seems at least since Alan Greenspan has been the concern. I mean, there used to be concern about inflation, keeping inflation low and keeping employment high. And those were sort of the dual mandates of the Fed. It seems now, what the equities market is doing, the bond market is doing is the paramount concern of the Fed. And that's been the case for almost a couple of decades now. So I think, no, it shouldn't be. But it has become that certainly.

- It does seem that way. Let's just talk about what you're doing with the portfolio right now. We had someone on from Heenan and Walsh earlier talking about how you need to start picking and choosing more carefully, diversifying that portfolio as we head into the fourth quarter of this year. What are you doing right now in any big moves you're making?

OCTAVIO MARENZI: Well, I've been very-- so I absolutely agree with that. It's a question of diversifying and making sure you have a broad base of stocks in portfolio and not to expose in any one direction. It is a sector that I like a lot, which is financial stocks. And financial stocks that did really, really well through the downturn. And I think they're set to continue to do quite well.

So if we start to get some market volatility, there's a number of players in that space that might do very, very well under the volatility. And I think about players like Goldman Sachs and Morgan Stanley, who've historically done quite well when markets have gone down as well. So in downward markets, they've done, well, as well, as they just sort of thrive on volatility overall on their trading site. So that's a sector that I've really been interested in.

I think there's areas, sort of, the inflation hedges like gold and cryptocurrencies that have looked like they're a bit overvalued and difficult to play at this stage. So I'm keeping away from those. That's basically sort of the portfolio mix for the time being.

- All right, Octavio Marenzi CEO of Opimas, always good to see you. Thanks so much.