Tuesday, September 19, 2023

Morning Note: What You Know About Nature

Among a plethora (11) of central bank meetings this week, the US’s of course will be the one most likely to move markets (although Japan's [commentary] indeed could)… With 100% certainty I’ll say that there’ll be no rate hike come Wednesday... Not because the Fed wouldn’t be justified, in fact, if Powell were indeed true to his rhetoric, there’d be one – as the latest inflation-related data conflicts with the recent disinflationary trend – it’s just that the market is discounting virtually zero odds of one.

And if there’s one thing we’ve learned during Powell’s tenure, it’s that he, and apparently a majority of the voting members whom he leads, care deeply about markets (or, well, and please pardon my cynicism, about certain market actors)… I’m tempted to say, at the expense of the real economy, but that wouldn’t be quite right. 

What would, in my view, be quite right, is to say that today’s Fed puts the short-term state of markets over the long-term, general, sustainable health of the real economy -- while favoring the fleeting, short-term state of the economy, of their own reputation, of the politician, and, let's say, of the private equity fund CEO.

So, to help you understand why -- aside from our macro signals -- we presently carry a good chunk of cash (short-term treasuries), gold, staples and healthcare equities, and hedge with SP500 put options, I'll ask you to think in terms of what you know about life, about cycles, and, if you will, about nature in general… I.e., what tends to happen, in the long-run, when we forever strive to satisfy merely our short-run impulses?

We can talk massive forest fires, levee breaks, lifestyle-induced heart attacks, liver disease and so on… But I suspect you already get the point.

Now, all of the above said, allow me to retract a bit of the harshness I heretofore expressed:  You see, the Fed does indeed care about inflation, and they do indeed desire to extinguish it (above their 2% target)... But, thing is, to bring the full, albeit dubious, force of their tools to bear would indeed shock the markets and send reflexive ripple effects into the economy that would indeed bring on recession... And -- back to being harsh -- in the process, they'd do serious short-term harm to their reputation, to the politician, and, yep, to the private equity fund CEO.

At the end of the day, I suppose the big thing-is is the fact that the likelihood of getting, in any sustainable fashion, back to their 2% target is a very heavy lift without the economy actually slipping into recession... And we've looked at what that portends for the equity markets.

Stay tuned…

Asian stocks traded down overnight, with 13 of the 16 markets we track closing lower.

Same for Europe so far this morning, with 16 of the 19 bourses we follow trading down as I type.

US equity averages are down to start the session: Dow by 236 points (0.68%), SP500 down 0.65%, SP500 Equal Weight down 0.40%, Nasdaq 100 down 0.95%, Nasdaq Comp down 0.88%, Russell 2000 down 0.38%.

As for yesterday’s session, US equity averages were mixed: Dow up 0.1%, SP500 up 0.1%, SP500 Equal Weight down 0.2%, Nasdaq 100 up 0.2%, Nasdaq Comp up 0.1%, Russell 2000 down 0.7%.

This morning the VIX sits at 14.78, up 5.57%.

Oil futures are up 1.37%, nat gas futures are up 4.22%, gold's up 0.04%, silver's down 0.37%, copper futures are down 0.92% and the ag complex (DBA) is up 0.50%.

The 10-year treasury is down (yield up) and the dollar is down 0.16%.

Among our 34 core positions (excluding options hedges, cash and money market funds), 7 -- led by Range Resources, DBA (ag futures), ICLN (clean energy stocks), VPL (Asia-Pac equities) and AT&T -- are in the green so far this morning... The losers are being led lower by MP Materials, Albemarle, Dutch Bros, XLK (tech stocks) and DBB (base metals futures).

From yesterday's Wall Street Journal article Why a Soft Landing Could Prove Elusive:
“If I’m sitting at the Fed, what bothers me most is I am seeing nonfinancial corporate earnings increase in the second quarter, and the stock market is not showing me any sign that investors expect earnings to be falling this quarter,” said Blitz. “If earnings are going up, employment is not going to get weaker.”

He expects Fed officials to discover next year that they have either raised rates higher than necessary or not lifted them high enough. That leaves little room for a soft landing. “Planes land. Economies don’t. They are in a constant, dynamic process that is ongoing,” Blitz said.

Have a great day!

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