Thursday, March 17, 2022

Morning Note: The Most Dangerous 3 Words In Investing

Suffice to say that yesterday's rally -- considering the distribution of the gains and the extent of the moves across regions -- was more about international developments (glimmers of hope around Russia/Ukraine and very market-friendly comments out of China) than it was about J. Powell once again coming to the rescue.

In fact, per the below from Bespoke Investment Group, yesterday's act was performed by the pre-2019 Powell... more or less...

"During his post-meeting press conference, the Chair was asked if a hypothetical increase in unemployment would “temper the FOMC’s desire to raise interest rates” to which he responded in part “price stability is a pre-condition of broad and inclusive full employment”.
• In plain English, that is a message from the FOMC that until inflation falls, the labor market is at best a secondary consideration; tightening will continue as long as inflation is higher than they are comfortable with.
• The FOMC’s Summary of Economic Projection (SEP) broadly aligned with that message, as the FOMC’s median 2022 GDP estimate was cut from 4.0% to 2.8% (2023 and 2024 estimates were unchanged) against an unchanged unemployment rate forecast at 3.5% over the next two years and a slightly higher forecast for 2024 (3.6%).
• At the same time, the FOMC is now projecting 7 hikes this year (versus 3 in December), another 4 next year (versus a total of 6 by 2023 in December), and rates unchanged in 2024 (versus a total of 8 hikes in December)."
"While the challenges of high and sustained inflation are much smaller today than at the start of the 1980s, Powell appears to have had a mini “Volcker moment” today, echoing the approach to rates that former Fed Chair Paul Volcker took during that period: inducing multiple recessions, cranking interest rates higher regardless of the unemployment rate, and disregarding all other objectives.
• The degree of policy response necessary to bring down inflation is lower today, but Powell is telegraphing the same approach and running the same risks, with serious implications for asset prices"

Powell's commentary implies that, indeed, the Fed put (the level where the Fed engages bigly to aid the equity market) carries a strike price significantly lower than previously thought. 

Well, we'll see -- the Fed utterly turned tail after its tightening at the time contributed notably to the 2018 Q4 ~20% correction in stocks, although inflation was not at all a thing at the time.

Asian equities continued to rally overnight, with 14 of the 16 markets we track closing higher.

Europe -- despite the Kremlin's rejection of the news of progress in the latest peace talks -- is hanging in there this morning; 14 of the 19 bourses we follow are in the green as I type.

US equities are (save for tech and banks) green to start the day: Dow up 54 points (0.15%), SP500 up 0.23%, SP500 Equal Weight up 0.30%, Nasdaq 100 down 0.03%, Nasdaq Comp up 0.14%, Russell 2000 up 0.65%.

The VIX sits at 26.20, down 1.42%.

Oil futures are up a big 7.12%, gold's up 2.03%, silver's up 3.96%, copper futures are up 1.51% and the ag complex (DBA) is up 0.77%.

The 10-year treasury is up (yield down) and the dollar is down 0.51%.

Among our 38 core positions (excluding cash and short-term bond ETF), 24 -- led by uranium miners, energy stocks, base metals miners, silver and ALB (lithium miner) -- are in the green so far this morning. The losers are being led lower by AMD, emerging market equities, bank stocks, Sweden equities and solar stocks.

I have heard myself many times over the years repeat the old Wall Street adage; the most dangerous four words in investing are "this time is different." 

Well, folks -- while human nature has evolved very little over the years, and, thus, greed and fear, as always, will forever push markets around in the short-run -- in many respects things are indeed different than they've been these past few decades (our structural inflation narrative highlights a number of what are essentially regime shifts, for example.)

Poker champ Annie Duke, in her excellent book How to Decide, suggests that "status quo bias" may be a very dangerous 3-word phrase: 
"When it comes to decision-making, current conditions also play an outsized role in how we think because we have a tendency to assume that those conditions will persist. The sense that the way things are now is the way they will always be is known as status quo bias (our tendency to believe that the way things are today will remain the same in the future). 
Of course, nearly everything changes over time. This includes your emotional state, how much money you make, or the political climate. Paradigms shift, challenges change, market conditions evolve, and technology provides additional solutions as well as creating new problems. When you look forward from the present, status quo bias distorts your view."

Have a great day!

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