Will the Fed Save Us?

Last week's price action was somewhere between depressing (down 3% on the week for broad indexes) and scary (down 3% on the week with daily swings greater than 3% in both directions). How I'm thinking of the world right now: The Fed. The Fed was the turning point in March's slide. Chairman Jerome Powell convinced everyone on the dovish hike. It worked. Will it work again? Let's explore other issues first. Food and Energy Inflation. As democracies respond to their still, overly dependent need for energy from autocratic nations, we will see money spent to build out sustainable energy faster,and reinvigorate underinvested traditional energy. Food will be a bigger problem. Food production is under pressure from the war. Fertilizer -- not BS, but actual fertilizer -- is a topic of conversation. The war is dragging on. I think food, especially for Europe and the Middle East, is going to be an issue later this year and next year. Supply Chains. The war in Ukraine is causing problems. The lockdowns in China are not yet being felt, but will be. I continue to borrow the term that we are moving from just-in-time manufacturing to just-in-case manufacturing and that will be costly and inflationary, but ultimately very good. The Non-Virtuous Circle. As Bill Hwang's arrest reminds us, flows matter. The ability to buy dips helps. I see the flows into ProShares UltraPro QQQ and think that everyone who bought last week, despite all the capitulation hype, are evidence there wasn't capitulation. I think there is more downside. I strongly believe, with anecdotal evidence, that many people at so-called disruptive companies experienced huge gains in their portfolios or via initial public offerings and diversified by buying shares in companies that were also disruptive and bought crypto and probably an electric vehicle stock. The EV is doing well, but the other investments along with their own company may be struggling. Unless this downside is corrected, there could be more selling to come. Earnings. I largely ignore earnings, but think this round is more about investors rethinking multiples than it is about the earnings themselves. The Fed (again). With elections looming and inflation an issue, I don't think it backs down. I remain convinced that balance sheet reduction hits asset prices harder and faster than rate hikes and that isn't completely priced in yet. Finally, even my mother knows the Fed meeting marked the bottom last month. Maybe lightning strikes twice, but I think all the talk of capitulation hasn't been backed by positioning and the market is ripe for a further pullback. Tacoma Narrows Bridge. The bridge oscillates back and forth on resonance frequency or some other thing difficult to define. It collapses in the end. I see the market behaving similarly. It gyrates wildly back and forth and I suspect it will resolve itself like the bridge, with a big crash to the downside (10% more on Nasdaq). Aside from the Fed, I fully appreciate that the market is illiquid in both directions (Thursday told us that). So, I'm still bearish, far less so than last week or the week before, but looking to sell rallies first and then buy dips, still being short. And my short focus is shifting from Nasdaq to the S&P 500. I'm OK with bonds and I like munis a lot here despite the billions that are still in for the bid on a daily basis at major Wall Street trading desks.

Will the Fed Save Us?

It seems all the talk of capitulation hasn't been backed by positioning and the market is ripe for a further pullback.

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