I believe the safer bet is we saw a bear rally today. These are more violent than bull rallies historically and we continue to have very high inflation, lower productivity from workers, and a likely 2nd quarter of negative gdp growth. I want to jump back in with my cash on the sidelines and start seeing weekly gains by leeps and bounds like in past bull markets. It’s hard to see the reason for a bottom yet.
Good visual when thinking about playing a bear market. Big swings in both directions.
One thing that stood out to me was, nearly every leg down starts with a pretty insignificant red day first. That means if you are wanting to play longer puts on a potential upcoming reversal, you historically dont need to catch the first day.
A good review of our market. Agree or disagree, but worth reading. From one of my advisors.
Semi-Annual_Market_News.pdf (805.0 KB)
Some Interesting points here -
Couple releases next week -
Gross Domestic Product, 2nd Quarter 2022 (Advance Estimate) | July 28 | 08:30 AM |
---|---|---|
Personal Income and Outlays, June 2022 | July 29 | 08:30 AM |
(full article - Biden administration on the defensive as dismal economic report looms | Fox Business)
Should the economy decline in the second quarter, it could meet the technical criteria for a recession, which requires a “significant decline in economic activity that is spread across the economy and that lasts more than a few months.” Still, the NBER – the semi-official arbiter – may not confirm it immediately.
The White House is now seeking to redefine what constitutes a recession before the data release, which is likely to show two consecutive periods of shrinkage. In a new blog post, White House Council of Economic Advisers chair Cecilia Rouse and member Jared Bernstein argued the economy is nowhere near a downturn as defined by the NBER.
“While some maintain that two consecutive quarters of falling real GDP constitute a recession, that is neither the official definition nor the way economists evaluate the state of the business cycle,” they wrote, noting that a “holistic” approach takes into account the labor market, consumer and business spending, industrial production and incomes. “Based on these data, it is unlikely that the decline in GDP in the first quarter of this year—even if followed by another GDP decline in the second quarter—indicates a recession.”
Its fascinating that just a few weeks ago the white house was saying the economy was strong driven by a robust labor market, sound familiar? and now they are trying to redefine what constitutes a recession. The reality is, bear markets are painful, stagflation is painful, recessions are very painful but we live in a world that is so comfortable we would rather try theatrics than acknowledging and working on the problem at hand.
But is it any surprise?
The White House doesn’t want a called recession because their fiscal policies contributed to it, and the the same goes for the federal reserve, their monetary policy contributed to the economic decline we are seeing right before our eyes. It also makes the bullshit “soft landing” perspective a much harder sell.
Instead of looking at nearly every data point coming out as well as recent hiring freezes, layoffs, weak earnings, something I have been talking about since January, it’s much more convenient to say inflation isn’t a problem, the economy is strong, the labor market is strong, the housing market is strong, and oh btw that’s not considered a recession anymore, nothing to see here.
I was in the workforce as a hiring manager in 2008, 2009, and 2010 while actively trading the market. This period of my life taught me how painful a recession can be as well as how universally wrong our leaders, the fed, financial media, and markets are capable of being. By design or ignorance, “history may not repeat itself but it sure rhymes”
But don’t take a small town Idaho boys perspective. Go look at the data, go look at financials, go look at earnings, go look at the last 50 years of bear markets, go look at the last 80 years of recessions, look at broad market P/E ratios, look at the history of monetary policy, look at what’s happening all over the world and draw your own conclusions.
Interesting Bloomberg article that came out this morning:
Original (paywall): https://www.bloomberg.com/news/articles/2022-07-24/fed-to-inflict-more-pain-on-economy-as-it-readies-big-rate-hike
Archive (no paywall): https://archive.ph/UmuvI
I like this chart from the article, really helps break down CPI components visually:
This is a great chart indeed, @TheMadBeaker !
That services inflation is the most sticky, and is the hardest to slow down. To the extent that it is over 2% already and climbing, difficult to see how things will turn around by the end of the year for the Fed to declare “Mission Accomplished” and start dialing down rates appreciably again.
Incidentally, here are the updated rate probabilities from just 11 days ago - we’ve priced away 50bps of rate cuts for December compared to then.
(Source: CME)
The market is basically betting that the Fed must pivot, irrespective of what they are saying right now. I.e. Fed’s words have very little credibility with market participants. So it’ll probably ignore anything JPow or his lieutenants say on and after FOMC.
How likely is it that the Fed will stop after two 50 bps hikes, after the 75 bps one in a few days? It really depends on whether we think the Fed will ease up because the economy is hurting (as @TheHouse notes above), even though inflation is not under control. We have discussed the prospect of stagflation at some length already; I suppose what surprises me is how much the market is leaning toward the Fed pumping the economy quickly (the “Fed Put”), ignoring inflation pains.
@TheHouse Have you seen any updated QE data? I’m curious to see how much has been done already and if there has been any impact yet.
Also, the chart below from @The_Ni from April is interesting. We are seeing housing declines now, but with decent profit figures coming out, the market is still happy.
Cleveland Fed is now forecasting a major reduction in MoM inflation - 0.27% in Jul and 0.54% in Aug, compared to actual 1.3% in Jun.
These are the actual numbers form the last 6 months:
This is good news for the markets because of inflation is really slowing this much, then even more reason for the Fed to reduce interest rates sooner. Trick is of course… its one thing to get inflation from 9% to say 5%… it is another to get it from 5% to 2% that we have all gotten accustomed to.
Next update is on Aug 10.
Recent comments from fed being quite hawkish leads me to believe CPI numbers are going to be higher than expected. If we see an increase, even if it’s very small, the market will react negatively. Inflation decline priced in currently which fueled the latest run up. I’m currently hedging bearish in small increments as much of my cash is on the bench.
Tl;dr
Virtually all marco indicators are pointing downward, but our pilots in the Fed are away for the summer and bond markets are confused as shit, so markets have decided to throw a party. Likely to lead to a rather big hangovers, but … no rush, apparently.
Everything - everything - is trending downward (except the market)
Deities of the financial universe (and the Fed) must be going “WTF!” at the markets, which seem to be on a rather spirited bull run.
This despite no signs of inflation slowing down with any haste, us being in a technical recession already, and the constant jawboning from Fed officials about how serious they are about tightening financial conditions - which everyone is seemingly ignoring.
Yet, there are many signs the economy is the titanic, and there are icebergs ahead. And we are all hurtling toward them at the same time.
First, an update to the HOPE framework we’ve been following since April:
https://twitter.com/MichaelKantro/status/1554614591061196803
H and O are bad. P and E are trending toward bad.
Next, we have 4 of the 6 indicators that are tracked by the NBER to determine a recession-recession (not the Wikipedia variety) decidedly trending downward:
Finally, while oil related inventories are at or near 5-year lows, they seem to be curling up:
Bond market still trying to make up its mind
On one hand, the inversion of the 10Y2Y is real, and getting realer. And hasn’t been this inverted in a while.
Although … not really sure what happened on Aug 2 to make bond yields switch direction:
Apparently all this is because the bond market is choosing “Yes” as the answer to the question: “Will there be rate hikes or rate cuts in 2023?”:
(Source:CME)
This is what it looked like two weeks ago:
So, so indecisive, the bond market is …
So what happens?
The general consensus out there amongst the “macro folks” is we see a bit of a market rally because everyone has been dying for one for a while, and there’s all this powder on the side.
But then reality will catch up at some point soon, markets will correct downward, go through current hedges, VIX will explode when we burn all those hedges and people panic, there is capitulation, and the healing can finally begin. An act that is supposed to play out into 2023.
Watching Maverick’s latest analysis here: The Bulls Are In For A Nasty Surprise! - YouTube
He seems to be saying pretty much what you are: that the market is mistakenly being bullish right now.
He also reviews the “fed pivot” points and counterpoints, and suspects that the next CPI print may have lower headline inflation due to gas coming down, but that core CPI may be higher than expected. Core CPI is what the fed has stated they care about most because “food and energy are too volatile”.
Unemployment Rate comes out at 8:30 AM EST today (Friday) in premarket.
Bulls should be looking for a slightly high number to indicate that the economy is slowing, “soft landing” style, based on the rate hikes so far.
Bears should be looking for a significantly high or significantly low number:
- Significantly high unemployment would mean the economy is slowing too fast, i.e. recession fears. Recessions are not good for the stock market.
- Significantly low unemployment means the Federal Reserve needs to tighten more aggressively.
A few notable points from this article,
"As prices jump across the board, consumers are increasingly relying on credit cards to make ends meet.
The number of people with credit cards and personal loans hit record highs in the second quarter of 2022, according to TransUnion’s latest report released Thursday.
The tally of total credit cards exceeded 500 million for the first time ever, led by originations among Generation Z, or adults ages 18 to 25.
Overall, an additional 233 million new credit accounts were opened in the second quarter, the most since 2008, according to a separate report from the Federal Reserve Bank of New York.
Credit card balances also jumped 13% during the second quarter, the largest year-over-year increase in more than 20 years."
and finally the perspective on repayment from the VP at TransUnion US,
“Consumers are facing several challenges that are impacting their finances on a day-to-day basis, namely high inflation and rising interest rates,” Raneri said. “These challenges, though, are happening against a backdrop where employment opportunities are still plentiful and jobless levels remain low.”
As long as “people have jobs,” she added, “they can figure out more of the day to day.”
We have discussed this at length here but I’m curious with these signals of continued strong credit impulse when we will see actual signs of more restrictive credit expansion, since we know changes in monetary policy carry a 3-6 month lag. I also cant help but think that labor itself is an oversimplification of the larger economic picture. Americans can very well have a job but overextend themselves financially which is what we may be seeing right now.
Now that I am back, I’m looking forward to playing the volatility with everyone, I believe we will continue to have great opportunities while also watching how this continues to evolve.
Hope everyone has a great weekend
Critical analysis by Maverick today on the CPI data: https://www.youtube.com/watch?v=jYKrjjD6v9g
Here are some key notes.
Headline and Core CPI came under consensus today, causing a super bullish reaction by the market. However, the “fed pivot/rate cut” + “peak inflation” crowd has not won.
[size=4]No Peak Inflation[/size]
Core inflation continues to rise higher and higher. No peak inflation. See the table below where we can see that the price drops have been fuelled (pun intended) primarily by energy and utilities. Core does not include energy.
Also, it’s hard to believe the table citing a reduction in used car prices and only a modest 0.5% increase in shelter. Who knows.
[size=4]No Fed Pivot / Rate Cuts[/size]
Immediately after the CPI data we have the most dovish fed members saying they are not done with rate hikes, and rate cuts are too premature, etc. etc. However, the stock market is pricing in rate cuts hard.
The bond market does not appear to be convinced about rate cuts, and seems to believe the fed rather than the stock market. The 2 and 10 year yields initially dropped hard, but regained much of that loss by end of day.
[size=4]Conclusion[/size]
Basically this market run is looking like another bear market rally on hot air. VIX is under 20. Puts are super cheap now for longer out durations as directional bets or to hedge your longs.
Thanks Kevin, this is great stuff!
Another sign of us not being “there yet” - interest rates are far, far behind inflation, trailing CPI print by 5.3%. Even if inflation cools down another 1-2% by the end of the year, and the Fed ends at 3.5%, there will be a gap to close.
(Source)
This is concerning because inflation is no longer primarily supply-side driven, and sustained demand destruction is needed to stamp it out.
One of the major factors the Fed is keeping an eye on is the employment situation softening. The initial jobless claims report will be important in that regard. Here are two historical comparisons of the Fed pivot (i.e. reducing rates) with jobless claims:
(Source)
Now, all these concerns are moot if the we do end up having a soft landing. And for its part, bond markets are convinced Fed will have to pivot soon, and equity markets are rising from the same expectation.
We do have another cycle of economic data before the next FOMC though, including CPI, so there’s still room for change on this take by the markets, if Aug comes in hot.
Not highlighted in your CPI table, but NG showing -3.6 I believe was mostly due to the CNG plant in Texas catching fire and NG prices crashed (since that terminal was like 20% of US export capacity).
However since they announced it will be back online in October, NG has jumped back up, so it will be interesting to see when the next report comes out in September what it shows.
Also, while diesel prices have been coming down around here, they are still a solid 50% higher than pre-war.
Finally I’ve been watching the farm reports. Crops are not doing well in the drought conditions across the US. Most are around estimated to be around 2021 yields right now, but the coming weeks are going to be interesting to watch. If we have a bad harvest with already high food prices… ugh.
Thanks for the input guys, something that I have been thinking about aswell that the Mav pointed out is the psychology of the fed. Throughout this year we have seen the fed play “good cop, bad cop” depending on how the market has reacted to new data and their policy decisions. Something that Bernanke talked about in the video I posted a few weeks ago.
This is how they have been guiding the market to try to achieve their “soft landing” on the equities side of things. Not too hot, not too cold. However, I don’t recall such a blatant disregard for their perspective happening like we saw yesterday. Typically when things have moved too hot, the fed will send out a few presidents and they will cool things off by saying some hawkish statements.
“I think anything is on the table for next fomc meeting”
“I think we need to be more aggressive with persistent inflation”
“I support a larger rate hike at next fomc” etc.
Then the market reacts and they send out the dovish tone.
But the market did not react to their statements at all yesterday, and the market actually continued to go up. This could be a new problem for the fed and it is completely due to them giving weak guidance and flip flopping their tone all year. The market is basically saying, sure keep doing and saying whatever you want, inflation has peaked and you will pivot, onward to new all time highs!
This of course will ultimately lead to a lot more pain as the fed continues to raise rates with QT in a weak economic environment, but if credibility thus their ability to shift the markets perception is lost, how will equities trade?
Id imagine we see much bigger swings, euphoric cocaine fueled rallies with deeper more violent declines.
Should make for some great trading.
I also want to throw out some perspective on this last CPI print yesterday for anyone reading this.
I was on the wrong side of this trade, I received a fresh pie in the face. Not a huge deal, Im up nicely on the week. However, this was a pre market data drop that I believed would move the market in a big way. 2%+ one direction or the another. If I wanted real exposure to this news I needed to hold positions overnight. I believe for whatever reason this has become the boogeyman. I get it, it isnt for everyone based on your trading strategy and risk tolerance but lets remember their are many different trading strategies, and many ways to think about risk.
I’m really not interested in only speculation before and after news drops. I’m here to trade, I honestly could care less if people “got it right” but didn’t trade it, or even worse, share after the market moves how they “knew” it would happen but they haven’t said anything publicly leading up to the event and had no positions.
Right or wrong my thoughts and positions are in the open for everyone to see, I intend to trade major events that move markets. Im going to be right sometimes and wrong sometimes, just like everyone else.
As MacroAlf says “If you want to know how someone thinks about the market, don’t ask for their opinion, ask to see their positions”
Ill be playing the trend (yes calls if that’s what’s on the menu) until we see a reversal. One of the easiest ways to lose money is to try to time a reversal perfectly. As I have said before, you don’t have to catch the first candle or even the first day. I’m looking forward to seeing how everyone is playing this volatility.
Hope everyone has a great day
Sharing an anti-thesis to the bear theory here, when housing is in a bubble and it begins to burst, folks begin selling those assets and moving the cash into stocks which have been beaten down. It’s similar to when we see investors cycle away from tech into blue chips.
I don’t remember if we saw this in 2008.