Return of the Lawn Chair(man)

Powell folded again.  That shouldn't be much of a surprise to those who learn from experience and recent history.  Those who learn by reading Bloomberg, WSJ, and CNBC, well, they were probably a bit surprised.  A weaker SPX, a raging bond market, and the Fed will follow the markets, or else.  And Powell isn't dumb enough to challenge the markets again, after his December experience.

Interest rate hikes work with lagged effects, as corporations gradually have to reissue debt and renew loans at higher yields.  Since rate hikes happened over a 2 year span from 2017 to 2018, they will start having maximum effect this year.  Add to that the fading fiscal stimulus from 2018, a US equity market that is probably in the top 5% in valuation in its history, and you have a powder keg that is about to blow up. 

No, a move from SPX 2950 to 2730 is not blowing.  I am talking a move down to 2100 over the next 18 months.  I choose 18 months because that is how much time there is left till the next US Presidential election.  If the economy weakens over the next year like most leading indicators are suggesting, that will put the nail in the coffin for Trump's chances at getting re-elected.  Again, that is what history and experience suggests.  The last 2 U.S. presidents that failed to get re-elected were Jimmy Carter in 1980 (bad economy) and George Bush Sr. in 1992 (coming out of a bad economy in 1991). 

Trade deal or no trade deal, the US economy will follow Europe, Japan, and the emerging markets into slowdown.  Today's ADP number is just another piece of evidence, after the weaker ISM and PMI numbers.  The bond market has been sniffing this out for the past month, and has gone into overdrive in a bond short seller seek and destroy mission. 

We are in one those rare, exquisite moments for an equity short seller where the risk/reward is absurdly good.  With all the clues that the leading indicators, valuations, and the bond market are giving, it is a no brainer to short the Fed rate cut rally.  And that is what yesterday was.  A realization that Powell is more dovish than what his underlings have said over the past few weeks, many who have been in denial about the Fed having to cut rates. 

The Fed is always reactive when entering the rate cut cycle, but with financial economy essentially the only dynamic part of the whole global economy, their lag times compared to past cycles (2000, 2007) will be less, and I fully expect Powell to either cut 25 bps in June meeting (if SPX is under 2750), or signal that a rate cut is coming very soon (if SPX is over 2800).  Between 2750-2800, he could go either way. 

In either case, that will provide the last sparks to an oversold short covering rally which started yesterday.  If things go according to plan, that should set up a good long term shorting opportunity in early/mid July.  May was just a small preview of things to come.  September and October will be the main event.