Latest Chartist: "According to LPL Research, a gain of 5% or more in January coming on the heels of a negative year represents a very strong plank in the bullish case. This has occurred five previous times since 1954. On each and every occasion, the S&P posted impressive gains ranging from 20% to 45% over the following year. The last time the S&P gained more than 5% in January after a negative year was in 2019. The S&P finished the year with a 29% gain. Whether history repeats remains to be seen.".....We'll see....keeping an open mind....
I have seen some others. A positive January means the odds a year is up is closer to 80% vs. 66% normally. All possible. However, there are not enough data points to make any of those analyses statistically significant.
I see more people with the Goldilocks view that want to look through the trough so they can buy stocks now. However, stocks are not at trough valuations. They are at upper quintile valuations.
Don't get me wrong. I respect the price action. I respect people have to cover shorts that won't go lower in site of negative news. I respect fund managers getting stopped into positions. However, the environment feels more like 2001-2003 to me (absent the 9/11 shock). A longer period of unwinding excesses fraught with several tradable rallies where we thought a new bull market was starting
All I've heard in investment banking world to start the year is that "credit spreads have peaked", Powell is doing "25-25 and stopping" and CNBC hype beast Brian Belski thinks 4,000 on the SPX is the low for '23. Everyone is calling off the dogs and saying its time to hit the market running. Optimism abounds and the start to the year shows capital hasn't been destroyed (maybe short capital has for the time being?)
You mentioned last year that it'll take time for PE capital to hurt and when that happens we know we're near the bottom. Interesting thing I've heard is that PE bros who don't understand marking to market expect to get full price for their horses during 2H of '23 *when* credit markets reopen and are preparing to come to market accordingly. Let's see if that need for liquidity forces sales to continue even at lower prices if Powell lays the hammer.
It is the instant gratification mindset that is so pervasive. These things take time to play out. It takes time for restrictive monetary policy to work its way through the system. However, if the bond mkt is correct, and rates are going to be 3% by 2024, the PE firms may be correct. I personally don't see that as my base case scenario at all. Also, if that happens, I don't see it in a soft landing but a deep recession where the FOMC needs to reverse course. Why do we think rates need to go back to 3% just because inflation steadies? Rates were at this level or higher for many years pre-GFC. I don't know if many active investors now were around preGFC though
I just wrote a piece that should be of interest re the upcoming Fed rate hike. Jay goes dove hunting explaining why I have high confidence they will surprise mkt players and do a .50%. Short version:
- .25% already priced in so useless
- Jay likes transparency and has already warned they will do higher and for longer than priced in
- players have given the finger by loosening conditions too much, as you explored
- Jay has said he is more concerned about doing too little than too much
- Jay will fight the doves just like his idol Volker had to do
- the dollar is weak and Lagarde warned of 2 more .50%, which is big from lower base than Fed
- Jay said there will be pain. What pain?
- Jay/Fed will lose all cred/face left if they don't do .50%
I hear where you are coming from but if 50 bps were on the table, I think the FOMC would have had some hawks putting forward that idea so we didn't approach the meeting with 0% chance of that priced in. I would expect aggressive forward guidance, increased emphasis on the dot plots as the actual path forward, and heightened discussion of increased QT which may not affect current Fed Funds but will affect the shape of the futures curve and will affect the 10yr, all of which would affect stocks. We shall see
It seems to me, Richard, that your expectations are maybe on the hawkish side of mainstream, yes? And my take is that it all sits on the 'forward guidance' foundation, which I think I at least partially answered. I note that you fail to address any of my points. So the mainstream position essentially totally depends on a weak Jay, who wouldn't dare surprise players and move without warning. This is why the players have no respect for him and have given him the finger, given that they are disregarding (like you are doing) everything he has repeatedly stated - Needs unemployment pain (recession), will go higher and for longer than mkt pricing, will 'stay the course', and that he knows he needs credibility if he is to get any help from forward guidance, which he is getting the opposite. His hero is Volker, who is famous for 'staying the course' (in his second wave) and moving more aggressive than majority wanted/supported. This is Jays big test. If he fails and lets the mkt players win, he will have no cred left and will be ignored. IMO it would guarantee another monster wave which he has said repeatedly he will not let happen. So yes, we will all soon find out, and if I'm correct, the majority will be caught on the wrong side, and look out below. Players will learn the hard way to listen and believe what Jay says, which is what he needs to have any chance of following in his hero's footsteps. All on the line here and now for Jay. For me the risk/reward is amazing, as mkts have been so strong it will likely be a 'sell on the news' (but not a crash) event barring a 'pivot' to no raise, which I say is virtually impossible. I like VIX/SOXS calls.
I dont think we see things nearly as differently as you seem to think. I have stated in all of my writings the FOMC will be much more hawkish than the market thinks and this is a big risk to the market. I have stated JayPow doesn't want to be the Fed Chair that lost control of price stability. However, the FOMC takes great pain in transparency and communication post GFC. Thus I think the odds of 50 in this meeting are extremely tiny otherwise some Fed speaker would have left the door open. Credibility does come with doing what you say. It does not come from surprising markets though
It could be a confluence of special factors. One, Jay has been down with covid. Two, mostly dove Fed speakers week before blackout. Three, and stated again, he has already warned for higher for longer. Four, perhaps he was undecided till recent data and mkt strength. You again have no answers to my points. Why? They don't fit your narrative,? (which is so mainstream). And last, something to remember is that mainstream always, always is on the wrong side all the way down in a bear (still buying dips expecting fed to support just like on the way up). Did you see the chart showing another major retail long position here? For me, the winning position in a bear is sell the rips. Bulls are fighting an incoming recession with CBs tightening, a hot and cold war, earnings slowdown, real estate bubble pop, rising defaults, energy crisis, a congress controlled by Trump radicals (freedom caucus) with debt ceiling fight. And what do the bulls have going for them? Nada Oh, and overbought! Soon see.
Mainstream is where bond market futures pricing is. I have answered your questions in my piece and in comments but you perhaps were not seeing them.
I see 25 bps. You say useless. On its own I agree but it won't be on its own
Transparency includes not shocking the mkt. They know the mkt is priced for 25. That is why 25 and hawkish commentary is preferred.
Jay is concerenednwithbdoingntoo little. I have said I feel he cares about his place in history. However, it is a committee and we can tell from the dots there are two camps on the committee. So it becomes how much can hawks convince doves
Jay's fight against the doves will include Lael Brainard
Volcker had more autonomy
The dollar is not the central focus of Fed policy. Price stability and full employment are. Jobs give the Fwd the room to do more.
By pain, he had said tighter final conditions which are at the same level as when they started so you are right there is no pain. I have written about final conditions being too easy multiple times
I disagree they lost credibility if they don't do 50. 25 with sufficiently hawkish language to take the cuts out of the curve adds cresibility
Latest Chartist: "According to LPL Research, a gain of 5% or more in January coming on the heels of a negative year represents a very strong plank in the bullish case. This has occurred five previous times since 1954. On each and every occasion, the S&P posted impressive gains ranging from 20% to 45% over the following year. The last time the S&P gained more than 5% in January after a negative year was in 2019. The S&P finished the year with a 29% gain. Whether history repeats remains to be seen.".....We'll see....keeping an open mind....
I have seen some others. A positive January means the odds a year is up is closer to 80% vs. 66% normally. All possible. However, there are not enough data points to make any of those analyses statistically significant.
I see more people with the Goldilocks view that want to look through the trough so they can buy stocks now. However, stocks are not at trough valuations. They are at upper quintile valuations.
Don't get me wrong. I respect the price action. I respect people have to cover shorts that won't go lower in site of negative news. I respect fund managers getting stopped into positions. However, the environment feels more like 2001-2003 to me (absent the 9/11 shock). A longer period of unwinding excesses fraught with several tradable rallies where we thought a new bull market was starting
Financial conditions need to get tighter.
All I've heard in investment banking world to start the year is that "credit spreads have peaked", Powell is doing "25-25 and stopping" and CNBC hype beast Brian Belski thinks 4,000 on the SPX is the low for '23. Everyone is calling off the dogs and saying its time to hit the market running. Optimism abounds and the start to the year shows capital hasn't been destroyed (maybe short capital has for the time being?)
You mentioned last year that it'll take time for PE capital to hurt and when that happens we know we're near the bottom. Interesting thing I've heard is that PE bros who don't understand marking to market expect to get full price for their horses during 2H of '23 *when* credit markets reopen and are preparing to come to market accordingly. Let's see if that need for liquidity forces sales to continue even at lower prices if Powell lays the hammer.
It is the instant gratification mindset that is so pervasive. These things take time to play out. It takes time for restrictive monetary policy to work its way through the system. However, if the bond mkt is correct, and rates are going to be 3% by 2024, the PE firms may be correct. I personally don't see that as my base case scenario at all. Also, if that happens, I don't see it in a soft landing but a deep recession where the FOMC needs to reverse course. Why do we think rates need to go back to 3% just because inflation steadies? Rates were at this level or higher for many years pre-GFC. I don't know if many active investors now were around preGFC though
I just wrote a piece that should be of interest re the upcoming Fed rate hike. Jay goes dove hunting explaining why I have high confidence they will surprise mkt players and do a .50%. Short version:
- .25% already priced in so useless
- Jay likes transparency and has already warned they will do higher and for longer than priced in
- players have given the finger by loosening conditions too much, as you explored
- Jay has said he is more concerned about doing too little than too much
- Jay will fight the doves just like his idol Volker had to do
- the dollar is weak and Lagarde warned of 2 more .50%, which is big from lower base than Fed
- Jay said there will be pain. What pain?
- Jay/Fed will lose all cred/face left if they don't do .50%
https://donjuan.substack.com/p/jay-the-hawk
I hear where you are coming from but if 50 bps were on the table, I think the FOMC would have had some hawks putting forward that idea so we didn't approach the meeting with 0% chance of that priced in. I would expect aggressive forward guidance, increased emphasis on the dot plots as the actual path forward, and heightened discussion of increased QT which may not affect current Fed Funds but will affect the shape of the futures curve and will affect the 10yr, all of which would affect stocks. We shall see
It seems to me, Richard, that your expectations are maybe on the hawkish side of mainstream, yes? And my take is that it all sits on the 'forward guidance' foundation, which I think I at least partially answered. I note that you fail to address any of my points. So the mainstream position essentially totally depends on a weak Jay, who wouldn't dare surprise players and move without warning. This is why the players have no respect for him and have given him the finger, given that they are disregarding (like you are doing) everything he has repeatedly stated - Needs unemployment pain (recession), will go higher and for longer than mkt pricing, will 'stay the course', and that he knows he needs credibility if he is to get any help from forward guidance, which he is getting the opposite. His hero is Volker, who is famous for 'staying the course' (in his second wave) and moving more aggressive than majority wanted/supported. This is Jays big test. If he fails and lets the mkt players win, he will have no cred left and will be ignored. IMO it would guarantee another monster wave which he has said repeatedly he will not let happen. So yes, we will all soon find out, and if I'm correct, the majority will be caught on the wrong side, and look out below. Players will learn the hard way to listen and believe what Jay says, which is what he needs to have any chance of following in his hero's footsteps. All on the line here and now for Jay. For me the risk/reward is amazing, as mkts have been so strong it will likely be a 'sell on the news' (but not a crash) event barring a 'pivot' to no raise, which I say is virtually impossible. I like VIX/SOXS calls.
We shall see
I dont think we see things nearly as differently as you seem to think. I have stated in all of my writings the FOMC will be much more hawkish than the market thinks and this is a big risk to the market. I have stated JayPow doesn't want to be the Fed Chair that lost control of price stability. However, the FOMC takes great pain in transparency and communication post GFC. Thus I think the odds of 50 in this meeting are extremely tiny otherwise some Fed speaker would have left the door open. Credibility does come with doing what you say. It does not come from surprising markets though
It could be a confluence of special factors. One, Jay has been down with covid. Two, mostly dove Fed speakers week before blackout. Three, and stated again, he has already warned for higher for longer. Four, perhaps he was undecided till recent data and mkt strength. You again have no answers to my points. Why? They don't fit your narrative,? (which is so mainstream). And last, something to remember is that mainstream always, always is on the wrong side all the way down in a bear (still buying dips expecting fed to support just like on the way up). Did you see the chart showing another major retail long position here? For me, the winning position in a bear is sell the rips. Bulls are fighting an incoming recession with CBs tightening, a hot and cold war, earnings slowdown, real estate bubble pop, rising defaults, energy crisis, a congress controlled by Trump radicals (freedom caucus) with debt ceiling fight. And what do the bulls have going for them? Nada Oh, and overbought! Soon see.
Mainstream is where bond market futures pricing is. I have answered your questions in my piece and in comments but you perhaps were not seeing them.
I see 25 bps. You say useless. On its own I agree but it won't be on its own
Transparency includes not shocking the mkt. They know the mkt is priced for 25. That is why 25 and hawkish commentary is preferred.
Jay is concerenednwithbdoingntoo little. I have said I feel he cares about his place in history. However, it is a committee and we can tell from the dots there are two camps on the committee. So it becomes how much can hawks convince doves
Jay's fight against the doves will include Lael Brainard
Volcker had more autonomy
The dollar is not the central focus of Fed policy. Price stability and full employment are. Jobs give the Fwd the room to do more.
By pain, he had said tighter final conditions which are at the same level as when they started so you are right there is no pain. I have written about final conditions being too easy multiple times
I disagree they lost credibility if they don't do 50. 25 with sufficiently hawkish language to take the cuts out of the curve adds cresibility
Well?