The market showed little reaction to Federal Reserve Chairman Jerome Powell's press conference Wednesday afternoon. After the Federal Open Market Committee's (FOMC) non-action on interest rates and collective "dot plot" projections that showed no action in 2020, it is finally time to ignore the Clowns of Constitution Avenue.
I have made my displeasure with Powell's stewardship of the Fed clear in many Real Money columns. In short, flooding the market with cheap money serves to devalue hard assets, badly hurts savers and in past business cycles has without exception created asset bubbles. Indeed, I believe U.S. stocks are in such a bubble mode right now.
But this week's calm could easily turn into next week's maelstrom. The latest round of U.S. tariffs on Chinese goods is set to go into effect Sunday. Fed meetings are always foreshadowed by the CME's excellent FedWatch tool, which was showing a 100% chance of "no change" heading into Wednesday's FOMC release.
I wish there were a similar "TradeWatch" tool to measure the chances of a U.S.-China deal, but watching the CME's equity futures can be as instructive as watching the fed funds futures that comprise FedWatch.
It seems as if the market is pricing in nothing but a happy ending to the trade war, and I just can't understand where that narrative originated. The hawks in the Trump administration, led by Peter Navarro, are dropping strong hints that there will be no trade deal before the 2020 elections. The impending launch of the next round of tariffs -- those levies would impact final consumer goods such as smartphones and laptops, not just commodities and intermediate goods as the prior tariffs had -- is a valuable bargaining chip for the Trumpeters, but, honestly, the trade war is no closer to resolution than it was three, six or nine months ago.
So, with Powell out of the way for this year, it is a good time to "fade" the rally, as the quasi-hipsters on CNBC would say.
Fading is a term derived from a game of chance, craps to be exact, and I don't gamble with my clients' money or my own. I do take opportunistic positions, though. Right now I have two in my trading vehicle, Excelsior Partners:
- I am long near-the-money calls on the long Treasury ETF, the iShares 20+ Year Treasury (TLT) .
- I am long the VIX ETF, the iPath Series B S&P 500 VIX Short-Term Futures ETN (VXX) .
I have learned that is far more productive to buy cheap, cheap options contracts than to sit around screaming "you people are too complacent; the VIX is too low." So, for my TLT position, for instance, it only takes a small move, 1%, to send those options into pure profit-land for me. That's what a low VIX does. It lowers the bar for profitable out-of-the-money plays.
That's also how I ended up owning VXX itself, as I had some calls that were in the money and decided that VXX was too cheap not to inherit.
So, let's see what happens between now and Sunday. Also, don't forget the U.K. elections are here on Thursday. If you believe everything is hunky-dory and there is no chance of anything going wrong anywhere, then just keep selling me those options contracts at ridiculously low premia. I appreciate the help.
