"Not My Problem"
Our mission is to understand, to identify, to adapt, and then to overcome. Not just words, these are the tenets that I preach to the public and do my best to honestly live by in my personal life.
Understand this, my dear friends... that you and those you love are under attack.
Identify.... the enemy? Clearly the Federal Reserve. The target of this attack? Middle and lower class wage growth. Inexplicable.
Adapt. Though I have run a net long portfolio all year, I have been telling everyone who would listen (including many times on national television) to go to higher cash levels since last January, and a more defensive posture all autumn. I truly hope you have listened. If you have not, I continue to be a resource. You are my crowd. I will never abandon you.
Overcome. This will be the hardest part.
Remember.... Jerome Powell, John Williams, Thomas Barkin, Raphael Bostic, Michelle Bowman, Lael Brainard, Richard Clarida, Mary Daly, Loretta Mester, and Randal Quarles. Remember these names. When you don't get that raise. When you lose your job. When you can no longer maintain your family's standard of living. When your children go hungry. These people are the ones who stood up and basically made clear that the plight of your family was absolutely no concern of theirs.
Absurdity
Market reaction was swift and violent. The S&P 500 closed just above a significant technical level (I have
Throughout the early days of my career, the senior traders taught me one thing key thing that applies here: "Don't fight the Fed." By the time I was the truly senior guy, markets were supported by loose monetary policy. If one were indeed long and wrong, one could simply wait, and end up being right anyway. Taking losses was almost unthinkable for nearly a decade.
A decade. That's right. I was critical of the Fed then, especially as it appeared to me that the ball should have started rolling toward tighter monetary policy as early as 2013/2014. Chair Janet Yellen was far too cautious. How good we had it. Far better to deal with an abundance of caution than with reckless abandon. Fed Chair Jerome Powell appears intent to reverse a near decade's worth of policy in just a couple of years. This is violent, and that is how markets are reacting. Talk about using a sledgehammer where a scalpel was required. Maybe use some finesse, Jay? Hold my beer.
This economy has one subset of macro data that has really been working nicely for a long while. The labor market. Folks who have suffered more than most, the middle and lower classes, are finally working full-time, and have started to realize wage gains for the first time since ... perhaps the Clinton administration.
A Deliberate Attack On The People
Better pull the rug out from under the common folk, Jay. There could be consumer level inflation lurking. We may or may not want to overshoot. We may or may not be reaching the neutral rate. Sasquatch may or may not roam the wilderness... I'll tell you what Jay Powell, this Friday's November Core PCE print better show somewhere close to 4% year-on-year growth. Nothing gets my Irish up like an attack on the defenseless. Intentionally slow down an economy that is clearly not "crushing it" across the board? What could go wrong? Aggressively burn $50billion worth of liquidity every month? Every month! What could go wrong?
Are we to take seriously the head of a central bank that sees the unrealized net value of its holdings decline by $66 billion from purchase price, while that central bank's total capital stands at just $39 billion? Yes, Jay... I read your financial statements. You want to screw with common American citizens? On a mark to market basis, you sir, look to me to be potentially insolvent. Nice work if you can get it.
What Are We To Think?
Signaling more rate hikes, with no change to the pace of balance sheet management, when literally every practitioner with a pulse has warned of a coming liquidity crisis, and while the bond market screams at you to please pay attention. Seems reasonable.
The underlying economic data has softened. That is fact. Peripherally, nearly every significant economy around the U.S. has hit a wall of synchronized significantly slower growth. The benefits of domestic stimulus are already wearing off at home. The slope of that yield curve has flattened in a big way since Wednesday. The 2s/10s spread now stands at 11 bps. What did you expect? It takes either a special kind of stupid, or a commitment to a (not so) hidden agenda to raise the Fed Funds rate by more basis points that that measure of the yield curve currently spans. It's not like that indicator is batting a perfect one thousand on predicting recession over 60 plus years or anything.
The words "data dependent" were never used on Wednesday, as the central bank indicated two more short-term rate hikes in 2019. Obviously, the trajectory for monetary policy is indeed on a pre-set course. Economic reality simply does not support what the public has been told.
We Can Fix This
Common sense would demand that repairing the yield curve be job one. I am not defending the easy money era. I am actually condemning it, and most especially the still-visible damage created by Operation Twist. Most of you who have been with me for a long time know that my natural tendency is Austrian in style. I believe strongly in a hard currency, and the viability of the free market.
My plan.. a mix of monetary and fiscal solutions (halt short-term rate hikes, slow QT, focus Treasury issuance next year heavily on 10-years and 30-years to whatever degree necessary to force long-term rates higher), which I have outlined over and over is not market friendly, but it would push out the onset of the next recession, as room would be created for normalization in an appropriate manner. Instead, the next recession has been brought unnecessarily forward. Hard to explain why this was required with no upward pressure on consumer-level inflation, and many sectors across our economy already in decline. At least we know who the enemy is now. Manage your money accordingly.
Note: According to their own projections, there are some at the Fed that expect to hike the Fed Funds rate by more than another full point over the next three years while unemployment increases, inflation remains stable, and economic growth sags significantly. This is the kind of cognitive ability that we are dealing with friends. Be careful out there.
A Poorly Run Firm
A friend actually asked me if they should buy Facebook (FB) on Wednesday afternoon. I told that friend that they could do what they want, that the stock will trade back and forth technically thanks the wonders of algorithms that race each other to the point of sale, but that they could buy this stock without me.
I am sure, by now, that you have seen the story that ran in the New York Times. According to that report, Facebook documents obtained by the Times indicate that the social media giant permitted approximately 150 companies access to user data. It seems that if true, the report includes data-sharing partnerships with several household names, such as Amazon (AMZN) , Microsoft (MSFT) , and Netflix (NFLX) .
To be fair, Facebook is denying that anyone was exempt from the firm's rules on privacy. While Facebook makes clear that no information was shared without user permission, one thing remains clear. This firm stands under a cloud of headline risk from a market perception. As further evidence of such headline risk, another newspaper, this time the Washington Post ran a story the same day reporting a lawsuit filed by the District Attorney in Washington, DC over the Cambridge Analytica access story that got this whole ball of wax rolling in the first place.
What I told my friend is that he does not need to bottom fish in this environment. Period. The hot money is now cold. If one needs to grab something, just looking at all of the boxes on my neighbor's stoop, buy technically stronger name such as Paypal (PYPL) , I have.
Economics (All Times Eastern)
08:30 - Initial Jobless Claims (Weekly): Expecting 218K, Last 206K.
08:30 - Philly Fed Manufacturing Index (Dec): Expecting 16.0, Last 12.9.
10:00 - Leading Indicators (Nov): Expecting 0.0% m/m, Last 0.1% m/m.
10:30 - Natural Gas Inventories (Weekly): Last -77B cf.
Today's Earnings Highlights (Consensus EPS Expectations)
Before the Open: (ACN) (1.86), (BB) (0.02), (CCL) (0.70), (CAG) (0.57), (NEOG) (0.30), (WBA) (1.44)
After the Close: (CTAS) (1.68), NKE (0.46)
