Friday, August 26, 2022

Morning Note: Goldilocks is Alive and Well

Below are snips from yesterday interviews with two Fed governors whose comments simply don't jibe with what the equity market appears to be pricing in of late. Suggesting perhaps that "the market" (traders in the aggregate) believes that the economy will contract to the point that it'll stay the Fed's hand before they break something, that inflation, in a weakening environment, will careen back to their 2% target, and that corporate profits will not decline as they typically do during economic contractions. 

Bottom line, Goldilocks is alive and well in the land of stocks... And, despite the quotes below, Chairman Powell's public appearance track record to this point should indeed have traders thinking that today (he speaks at 7am pt) will be no exception...

It, I strongly suspect, would be a real shock to the market should he echo what a number of his committee members have felt compelled to state of late:

This from Bloomberg yesterday:   emphasis mine...

Kansas City Fed President Esther George, speaking in
Jackson Hole, Wyoming, where she hosts the Fed’s annual policy retreat, said the central bank hasn’t yet increased interest rates to levels that are weighing on the economy and may have to take them above 4% for a time.
“It’s very important that we are clear in our communication
about the destination we are headed,” she told Michael McKee and Kathleen Hays in an interview with Bloomberg Television. “We have to get interest rates higher to slow down demand and bring inflation back to our target,” said George, who votes on monetary policy this year.

Asked how high the Fed should push borrowing costs, George said there was “more room to go” and pushed back against bets in financial markets the central bank would begin cutting rates next year.
“I think we will have to hold -- it could be over 4%. I
don’t think that’s out of the question,” she said. “You won’t
know that, I think, until you begin to watch the data signs.”

And this:   

US central bankers stressed the need to keep raising interest rates and St. Louis Fed chief James Bullard said officials should act quickly and lift their policy benchmark to a 3.75% to 4% range by year end.
“I like the front-loading. I like the idea that you get the
rate increases in earlier rather than later,” he told CNBC
Thursday in Jackson Hole, Wyoming. “You show you are serious about inflation fighting and you want to get up to the level that will put downward pressure on inflation. We are at 2.33% right now. That is not high enough,” he said, referring to the current effective level of the benchmark federal funds rate.

Bullard said he’d deliberately not talked much about the
outlook for rates in 2023 because it’s such a “volatile”
environment, but cautioned that markets were underestimating the risk that price pressures fail to ease, and that the Fed has to push harder on the policy brake than investors expect.
“A baseline would be that probably inflation would be more persistent than what many on Wall Street expect and that’s going to be higher for longer,” he said. “That’s a risk that’s underpriced in the markets today.”
Stay tuned...

Asian equities rallied again overnight, with 12 of the 16 markets we track closing higher.

Europe is leaning red so far this morning, with 11 of the 19 bourses we follow trading lower as I type.

US stocks are mixed to start the session as well: Dow up 59 points (0.19%), SP500 down 0.01%, SP500 Equal Weight down 0.03%, Nasdaq 100 down 0.04%, Nasdaq Comp down 0.05%, Russell 2000 down 0.22%

The VIX sits at 21.93 up 0.69%.

Oil futures are down 0.83%, gold's down 0.30%, silver's up 0.45%, copper futures are up 1.76% and the ag complex (DBA) is up 0.64%.

The 10-year treasury is down (yield up) and the dollar is down 0.61%.

Among our 35 core positions (excluding options hedges, cash and short-term bond ETF), 14 -- led by base metals futures, ag futures, emerging market equities, silver and Disney -- are in the green so far this morning. The losers are being led lower by uranium miners, our semiconductor ETF, Nokia, AMD and oil services stocks.

True in investing, and hedging:
"...on average, good decisions are more likely to result in good outcomes than bad decisions. They cannot ensure good outcomes, but they increase the chances of good outcomes. If you consistently employ good decision processes, you will accumulate better outcomes over the course of many decisions."

"Bad outcomes often flow from bad decisions, particularly when decisions are made more on whim, and impulse outweighs thinking. The key is to judge the quality of the decision separate from the outcome, and ask yourself if you could have done better at the time you made the decision with the information you had."

"On a day with a 90 percent chance of rain forecast, you decide to leave home without an umbrella. It pours; you get very wet. Unless you have something against umbrellas, this was a bad outcome emanating from a bad decision. Even if it hadn’t rained, bringing the umbrella would still have been the right decision."

--Levy, Dan. Maxims for Thinking Analytically

Have a great day!


  1. Marty: thanks for the updates. Fed Powell sounds tough. He warns of "some pain" ahead. You are right that September will probably be volatile.
    Take care! Have a great weekend!