Morning Note

Well, that (fed meeting) didn't go well for markets!

In yesterday morning's note I suggested that if Powell came across the least bit hawkish the market would hate it... While he actually did the balancing act he virtually had to, markets clearly needed to hear that the Fed was ultimately concerned with the consumer economics of higher energy prices.

I closed yesterday's note by expressing that we're feeling good about our overall mix right here, we nevertheless felt the effect of what happens on a day when virtually everything -- stocks, bonds, commodities (save for oil and ag) and international markets -- decline in unison... I.e., short-term correlation can/will overwhelm even the most thoughtful diversification... That said, our core allocation did outperform the broader market averages -- reflecting the defensive positioning we continue to maintain.

Thinking about our core themes, should the Middle East conflict remain unresolved, we believe our energy, and energy infrastructure holdings will increasingly reflect their fundamental value as both inflation hedges and supply-constrained assets... Our put option hedges on the S&P 500 -- which performed well yesterday -- provide additional support if equity markets continue to struggle... We would also expect relative outperformance from our gold and defensive sector allocations as recession risk increases under the "remains unresolved" scenario... All of which are playing out at the open this morning -- amid a continued rout of global equities -- with one glaring exception, gold (which is a notable drag this morning on our core allocation).

Gold is being pulled lower (notably this morning) by the same dynamic that has partly driven its extraordinary rise — its sensitivity to the dollar and interest rates. When rates spike and the dollar strengthens (as they did yesterday on the PPI print and Powell's not-dovish-enough tone), gold faces mechanical selling pressure regardless of the geopolitical backdrop. This is a correlation headwind, not a thesis break.

If, on the other hand, a resolution emerges, the likely removal of an oil-driven inflation premium from the market could be a meaningful catalyst across the majority of our positions simultaneously... We've been careful to build a portfolio that doesn't require us to call outcomes -- it's structured to ultimately hold up (relatively-speaking) in either direction.

Of course we take nothing for granted, and, most importantly, we remain flexible and open to all possibilities.