Risk Management and Bet Sizing

Rule No. 1: Never lose money. Rule No. 2: Never forget rule No. 1. - Warren Buffett

When I was young, I used to think more was better.  Big bets and big gains.  Trying to hit home runs.  Not focusing much on the downside, and the long run path.  It was always short term thinking, impatience.  Trying to make money quickly, without thinking about the long term implications of my strategy.  I've learned over the years at how flawed that strategy is.  Experience is a stern teacher in the market, especially for those that are stubborn and hesitant to change.  If you don't learn lessons from losing lots of money, you won't last in this business.

Managing risk is the most underrated aspect of trading and investing.  In a game where you will lose often, you have to be able to handle the ups and downs that come.  Being too conservative is much, much better than being too aggressive.  Those that are too conservative may not make a fortune but they stick around, survive, and have a chance to learn and get better.  And slowly accumulate.  Those that are too aggressive can have big runs but they can't dance around the raindrops and stay dry forever.  Those that push the limit don't survive and eventually have to get a real job.  

Being too conservative is a sign of fear.  That can be a good or bad thing.  It limits bet size which keeps you in the game.  But it also minimizes opportunities when more could have been made.  The financial markets don't attract too many of these types of people.  These types usually just put their money in equity index funds or bond funds.  Most of the types that are attracted to actually making their own investment decisions are usually too aggressive.  

The reason most traders fail is not because of bad stock picks or bad trading decisions.  Its because they bet too big and lose too much when they are wrong.  Traders usually think about how much they will make when they make a trade.  Not how much they could lose.  Its that eternal optimist in all of us where we cling to hopes and dreams.  Hoping and dreaming is a killer in the markets.   Even if you don't blow up trading too big, you will dramatically underperform a less risky trader.  Consider 2 traders:  

Trader A:  Makes or loses 50% of his account per trade.  Wins 60% of the time.  

Trader B:  Makes or loses 10% of his account per trade.  Wins 50% of the time.  

Who performs better over the long run?  

Let's do this exercise:  

Trader A and B both start with 100.  

Trader A:  wins 6 and loses 4.  100 -> 150 -> 75 -> 113 -> 169 -> 85 -> 128 -> 192 -> 96 -> 144 -> 72.  60% win rate but loses 28% after 10 trades.   

Trader B: wins 5 and loses 5.  100 - 90 - 99 - 89 - 98 - 108 - 97 - 87 - 96 - 106 - 95.  50% win rate but loses 5% after 10 trades. 

Imagine if both trader A and B both had the same win rates.  It would be an absolute disaster for trader A.  Even with a 10% higher win rate, trader A massively underperforms trader B.

Excessive volatility in the account balance is a huge drag on performance. 

Another big negative for traders that are too aggressive is that big bet sizes force unwanted decisions at bad times.  Forced selling is the worst way to sell (when long).  Forced buying is the worst way to buy (when short).  Proper bet size allows you to weather the storm, stay with trades through short term drawdowns to their ultimate destination.  It gives your trades time to work, which is half the battle.  Being forced to push the eject button because of short term market volatility destroys returns.  Closing out trades because you are wrong instead of because you are losing money is a big difference.  Its hard enough to make money playing on your own terms.  If you are forced to play on the market's terms, you will be chopped up and whipped around and left in tatters.  

There is a reason that Warren Buffett says the most important rule is never lose money.  He doesn't mean it literally, because that's an impossible task, but states that rule to emphasize the importance of limiting losses to growing wealth. 

The last week of the year, and for the past few trading days, you have seen tax loss selling and a cleaning up of portfolios for window dressing purposes.  That has led to weakness in tech stocks and bonds.  Its been a terrible year for most fund managers.  And amidst hopes for a Santa Claus rally, the firepower was lacking for buyers to push the market much higher.  I remain neutral on stocks, and did miss a potentially very profitable short a couple of weeks ago post CPI, but missed trades happen.  I overestimated the willingness of investors to chase stocks and make bad decisions while fundamentals remain terrible.  Although the price action is weak, I remain bullish on bonds as I expect the fundamentals of a weakening economy and falling inflation will supersede central banks' hawkish rhetoric.  

My New Year's resolution for 2023 is to trade less by betting smaller and having wider price targets.  By betting smaller, I will achieve 2 important things:  1) be less affected by short term price movements, leading to better decision making and less forced trades (stops/liquidations). 2) have a better quality of life with less stress.  

Here's to a great 2023.  Happy New Year.

When the Fed Pauses

We are very close to the end of the tightening cycle.  The LEIs and PMIs are both showing an economy that is at the beginning of an economic downturn.  While the labor market still hasn't cracked, its not as strong as the nonfarm payrolls have shown, due to inaccuracies and double counting part-time jobs held by one person.  The divergence between the household survey and the establishment survey is huge, which tells you that 2nd jobs have been a big part of the strength in the nonfarm payrolls number.  Also, the birth-death model underestimates job losses when the economy suddenly starts to weaken, as businesses unlikely to respond when they are about to go out of business or are out of business.  

Inflation is trending lower but people are still spooked by the trauma of higher than expected CPI prints for most of 2022.  On the housing side, the end of eviction moratoriums and the increase in supply in 2023 will ensure that rent inflation is subdued.  If layoffs blowup like I expect it to next year, a lot of Millenials will be moving back to their parents' basement rather than staying in an apartment.  The only fly in the ointment to my disinflation thesis for 2023 are commodities.  Commodity prices could go back up again as China comes back on to the market for their "reopening".  I don't think it will be as big as people expect, but the anticipation of it could boost energy prices in the first half of 2023.  But overall, even if oil prices go back up, the year over year comparisons will be favorable, so higher oil prices won't feed too much into the CPI.  

I know they say that Powell doesn't want to stop hiking and then start hiking again if inflation stays sticky, like they did in the 1970s, but he's deluding himself if he thinks this economy is anything like that of the 1970s.  You have to remember that in the early 1970s, the US went off the gold standard, and that ushered in an inflationary wave, exacerbated by the oil embargo.  You had a fast growing younger population, with a much higher demand for goods, while not having the mass globalization as you do now to be able to meet the demand.  The money supply was growing faster than it is now.  And there was much less household debt.  The household debt to gdp ratio is almost double that of the 1970s.  

Households cannot handle high interest rates when they hold so much more debt.  Not only that, the wages adjusted for inflation were much higher in the 1970s than they are now.  A lot of people are buying into the sticky inflation/deglobalization/1970s theme but the data just doesn't support it.  

I don't know what Powell is thinking, although many are saying that he wants to be revered like Paul Volcker.  But Volcker was just a person who was in the right place at the right time.  He wasn't the one who killed inflation.  Commodity deflation, productivity growth from technology leading to deflationary forces, and the dollar going on a massive appreciation cycle as it became the clear global reserve currency were the inflation killers.  

The bond market is the biggest beneficiary of a Fed that finishes its rate hiking cycle.  In the last 4 rate hiking cycles (1994, 1999-2000, 2004-2006, 2017-2018), 10 year yields fell rapidly after the last rate hike.  While stocks also did well right after the Fed finished hiking, the strength was temporary in 2 of 4 cases, as stocks dropped bigly in 2000-2002, and in 2007-2008.  But all 4 cases saw bond yields trend lower for years after the final hike.  

Here is what happened to 10 year yields after the last rate hike and during the subsequent pause in 1994, 2000, 2006, and 2018-2019.  

Here is what typically happens after the last rate hike by the Fed.  They never signal a future rate cut, they either signal more rate hikes which they can't execute due to economic weakness, or they signal that they will keep rates at current levels for an extended period.  They NEVER signal a rate cut right after their last rate hike.  So don't expect one.  Just expect the bond market to start rallying after the dark cloud of future rate hikes is lifted and the sunny skies of future rate cuts is on the horizon.  

People like to look in the rear view mirrow when forecasting, which is why you see a lot of fears of another bond market liquidity squeeze like you saw in September/October or hawkish central banks.  Central banks ALWAYS fight the last battle.  They have no foresight.  They are always in CYA mode (cover your ass), which means they take the politically safe route, which is to fight the last battle.  The last battle was inflation.  The next battle will be a deep recession.  I don't buy the shallow recession reasoning at all.  When you have secular stagnation and central banks still fighting the last battle and not coming to the rescue, you will get a deep recession and lots of job losses.  They are the firemen who always come an hour late, when the house is already burned down.  Expect the same result this time.  The house is burning now, and they are just adding more gasoline to the fire.  When they figure out their policy error, they'll act like nothing bad happened, they will just push their mistakes under the rug, and go back to what they always do: fight the last battle.  

Neutral on the stock market.  After this dip, leaning bullish on bonds.   The BOJ yield curve control tweak scared some weak hands, but it doesn't change anything.  Japan isn't really that relevant anymore in the big scheme of things, the big current account surpluses from their heyday are over.  The yield differentials are still huge so their won't be much repatriation unless they follow the ECB and get really aggressive.  Doubtful that happens before the global economy is in a deep recession, at which point they will stop whatever minor tightening they have done.  It appears that too many are jumping on the weak dollar bandwagon as the ECB and BOJ have suprised on the hawkish side.  Fundamentally, the dollar is still the cleanest dirty shirt out there.  Europe's energy policy is terrible.  Japan just isn't printing enough money to sustain big inflation numbers.  And after a big dip, I expect a return to a strong dollar in early 2023 as fundamentals reassert themselves. 

Cookie Cutter

First it was a hawkish Powell, then it was a hawkish Lagarde.  A very hawkish Lagarde who seems to be acting with a 3 month lag on Powell.  Apparently she didn't get the memo that inflation has peaked and is coming down.  Is she communicating by letter via sea mail with Powell and just received the letter in the mail about his hawkish Jackson Hole speech?  

Central banking is the embodiment of government work: easy, no accountability, and lots of incompetence.  No wonder you get such bad monetary policy.  The US had a demand side problem from too much fiscal stimulus and can fix it with demand side solutions.  That is why you are seeing some traction in fighting inflation with monetary tightening in the US.  But the EU has mostly a supply side problem(due to Russian gas cutoff and horrible energy policy) that they are trying to solve with demand side solutions.  Lagarde can't hike her way to more natural gas.  Raising rates to restrictive levels will just kill the economy and keep energy prices high.  The worst of both worlds.  Stagflation.  

These central bankers are such herd creatures.  They don't have an ounce of independent thought.  The only one sticking to their guns is the BOJ.  They are doing nothing.  Its comatose central banking 101.  Same old, same old.  These central bankers are straight out of a cookie factory.  Cookie cutter.  If you've heard one, you know what the next one will say.  They are always looking firmly in the rearview mirror and have no foresight.  They are constantly in CYA (cover your ass) mode.  They are basically politicians who no one can vote on.  

I wonder if Powell believes his own bullshit.  5%+ Fed funds rate and keeping them there for longer in 2023.  Does he think the US is the same economy that it was in the 1990s?  Or even the 1970s-1980s?  From the articles I read, he seems obsessed with being the next Volcker and being revered as an inflation fighter.  The US population in the 1970s was much younger and growing faster.  There was little globalization to keep wages in check.  There was no wage arbitrage.  Much less debt.  

Keeping rates above 5% for an extended time will guarantee a very weak housing market, and by extension, a deep recession.  Its not a matter of if, but when things blow up.  And we all know that when things blow up, the Fed will go back to their usual playbook of cutting in huge chunks, quickly, getting to the zero lower bound and then doing QE.  Same thing for the ECB.  By looking in the rear view mirror, they will ensure that the bond market will go back to the last regime of ZIRP and QE.  

High inflation isn't suddenly this new structural regime, its a function of massive money printing and handouts in 2020 and 2021.  Once again, the market is extrapolating a black swan event which caused inflation to spike as the new normal.  It is confusing cyclical with structural factors.  We have cyclically high inflation.  There is structurally low growth.  Structural low growth doesn't go away by having a crack up boom for 2 years.  The population is basically flatlining.  There is no productivity growth.  All future growth in the US, Europe, and East Asia will come from fiscal stimulus.  That's the only growth driver.  The developed economies have reached their end game in capitalism. Capitalism depends on continuous growth to function properly.  The inability to growth without fiscal largesse is a sign of secular stagnation.  

The Fed and ECB provided the 1-2 punch which is inflicting a lot of pain on the stock indices.  I didn't expect this reaction, but I also didn't go long.  It is days like Thursday which make me avoid the long side.  Going long in a bear market (unless after a deep pullback) is picking up quarters in front of a bulldozer.  Chasing strength in a bear market is asking the market to take your money.  Now that SPX has cracked wide open below 3900, I am staying on the sidelines.  I have levels where I am comfortable shorting, and at this juncture, not comfortable shorting under 3900.  That doesn't mean I won't get short if it goes under 3900, because that's exactly what I did in September.  I just need the right setup to do it.  And things aren't lined up yet.  With bond yields trending lower, its going to take a bit longer to build up the energy to make another sharp move lower like you saw from August 15 (SPX 4300) to September 30 (3600).  In investing, you don't have to swing.  You can wait for your pitch.  There are no called strikes, as Buffett says.  Its a time to wait.  No need to rush into a position with the low liquidity and usually boring environment of the final 2 weeks of the year. 

Recession Consensus

Almost everyone seems to realize that a recession is coming, but they are not selling stocks.  You are seeing some equity fund outflows after some inflows, but not a continuous trend of outflows.  They are also not buying bonds.  Instead, they are just adding to cash, and waiting.  If stock valuations were much lower and we weren't in a post-bubble environment, my natural inclination would be to lean bullish stocks.  But that's not the case.  Less than 12 months have passed since the top of the biggest bubble in US stock market history.  Stocks are still historically overvalued.  US stocks are considered a "good" asset class.  The big picture is very bearish.  Even without a potential recession and future earnings downgrades.   

If you zoom in and focus on light hedge fund/systematic positioning and somewhat bearish investor psychology, you can figure out a way to be bullish, but its a bit of a stretch.  I am not willing to undergo contrarian mental gymnastics to rationalize a bullish equity position in this environment.  Even if most people are expecting a tough 1st half of 2023 and a mild recession, which is the base case for most investors.  

As I have said in the past, overall, the institutional investor base is wiser than they were in the past.  They now put less focus on economic fundamentals and more focus on monetary and fiscal policy.  That's a better way to invest than to focus on the cyclical swings in the economy.   That is why studying past historical patterns of stock market behavior and reaction to monetary policy could lead to faulty conclusions.  In the past, earnings projections and current economic conditions had a much bigger impact on stock price movements than they do now.  Investors have wisened up.  They now view loose monetary policy with the corresponding weak economic conditions as an overall benefit to the stock market.  That's why you didn't get that big flush out of panicked investors selling on earnings disappointments that you saw in Q3 in October, because they are willing to look past the current downturn if monetary policy becomes more favorable.  

Yesterday's cooler than expected CPI number doesn't change much.  It may change your view if you thought that inflation was going to be stickier than expected.  But I've been of the view that disinflation is here and all the high frequency price data for housing, goods, and transportation costs are pointing to the same thing.  It was just a matter of time when the high frequency data would flow through to the CPI.  Since government data is lagging and often inaccurate, putting too much weight on is asking for trouble. There were so many ludicrous price targets from the sellside if the CPI was lower than expected or higher than expected, and with IVs juiced way too high, the market quickly faded after the initial spike higher.  I didn't expect a fade so big, otherwise I would have gotten short, but I suspected that it was not going to play out like it did after the November CPI.  With FOMC today, it seems like there is some leftover trauma from the past 2 cliff drops after the FOMC in September and November.  

Some may disagree with this view, but Powell is a natural dove.  He sounds mealy mouth and noncommittal if you listen to him.  That's what the Fed chair position does to people.  They get scared of spooking the markets.  So it took him some time to have the balls to spook the market to tighten financial conditions and raise rate expectations.  His Jackson Hole speech, and the past 2 FOMC meetings did that job.  With Fed funds rates projected to top out close to 5% in the spring of 2023, there is no need to act hawkish when the rate expectations are already so high.  It was a different story when the inflation data was not going down and the market was still pricing in a less hawkish Fed.  Who knows, maybe Powell flip flops from his November 30 speech and puts on his full hawk act again, but the economic data is trending much weaker now than it was 3 months ago when he went on a rampage.  The Angry Powell phase is over.  He may still try to sound tough, but he's lost his edge.  Even if he tries to fight the bond market this time, I don't expect it to gain much traction.  The data is showing weakness and with it, the more frequent recession calls for 2023.  

All the fund flows data for 2022 has shown a stubborn willingness to buy the dip in stocks and a fear that bonds will keep going lower.  After the first quarter where you saw hefty equity inflows, you went sideways with no meaningful net flows from April to November.  During that time, bond outflows accelerated and the household percentage of bond assets is historically low.  With an aging demographic and higher yields than almost anytime since 2008, bonds will attract inflows in 2023.  There is a notable sentiment shift from outright hate and fear to gradual acceptance.  It will take time from investors to fully get back on board the bond bus.   The supply/demand picture is not optimal with such huge budget deficits and QT for Treasuries, so I don't expect a huge rally from bonds right away.  But with the economic weakness and the secular stagnation thesis still very much alive, rates at these levels are not sustainable.  When the economy gets really weak and the shit hits the fan, they will cut big and fast.  The bond market is telling you as much.  Take a look at this inverted SOFR yield curve.  Its pricing in a drop to 2.75% Fed funds by 2025. 

Its almost the exact opposite of what investors were expecting in late 2021, with the SOFR curve quite steep, yet many expecting just gradual rate hikes for the next 2 years.  The bond market isn't always right, but it is more often right than Fed forecasts.  The Fed forecast of higher for longer is dubious.  Its what they say to try to tighten financial conditions, but it has no bearing on future monetary policy.  Forward guidance is just empty promises to try to trick the market to do its work for them.  Those who believe Fed forward guidance for 2023 are making the same mistake, the other way around as they did in 2021, when the Fed said lower for longer.  

Missed the short after the big gap up on the cool CPI, as my base case was shorting after the FOMC today.  It looks more apparent that there is a somewhat soft ceiling above SPX 4100 and soft support at SPX 3900.  Dare I say that we'll be range bound for the next month?  Its not flashy, but that's my projection.  If we get a rally after the FOMC that takes the SPX toward 4100, will enter shorts.  Although I am leaning towards a rally post FOMC, if there is no rally, I'll wait on the sidelines.  Definitely not interested in the long side.  This is still a hit and run market.  Seasonally, its not a favorable time for the bears.  I usually ignore seasonality, but the end of the year when liquidity is light is one of the few times that seasonal influences are strong.  Its not a market to bear down and take long term positions.  There are no great short term setups here.  Let the market come to you.

Sun Rises in the Bond Market

The positive correlation between stocks and bonds is weakening as the focus shifts from inflation to economic weakness.  The CPI report in November was the game changer.  It gave bond investors the green light to start buying as the fear of an inflationary price spiral and a possible UK like bond vigilante led squeeze higher in yields was put off the table.  As most bond fund managers have been afraid to add duration ahead of this freight train bear market, there was a lot of pent up demand that was building as 10 year yields broke the 2022 highs of 3.50% and squeezed mercilessly higher into late October, only to be saved by a nervous Fed using their loudspeaker, Nick Timiraos of the WSJ to calm down the market.  The day that Timiraos came to the rescue on October 21 was the top in 10 year yields at 4.33%.  

Since the CPI release with the softer than expected inflation print, bond investors have come out of their bunkers and looked at the charred landscape as 10 yr yields have gone from 1.51% at the start of 2022 to the mid 3s.  People forget in times of distress what they are buying and selling.  A 10 year Treasury note is pricing in the average of the Fed funds rate over the next 10 years + term premium.  It is a world where developed world population growth is approximately zero, and productivity is also around zero (maybe negative given the work from home trends, lack of meaningful technological advances, and increasing labor power = lazier workers).  Nominal GDP growth will be driven by inflation, not economic growth.  Expect a return to secular stagnation until the next big stimulus package (2025 story?).  2020-2021 was an anomaly.  You had a convenient excuse for politicians to go full bore populist and spew out tons of fiscal stimulus for individuals, state and local governments, and corporations.  

That is something that will happen again, but the stars have to align to get that kind of scale of coordinated, global fiscal pump priming.  The right mix of Republican and Democrat control of White House and Congress, either total control for one party or a Republican president.  Republicans will obstruct fiscal stimulus if there is a Democrat president in power, but not if its a Republican president.  And Democrats always believe in moar fiscal stimulus, no matter who the president is.  So in most cases, a Republican president leads to more fiscal stimulus than a Democrat president because its not common for Democrats to control both the White House and both Houses.  

Back to the bond market.  Its has been in a 26 month downtrend from August 2020 before it finally bottomed in October.  That is a LONG downtrend.  You have flushed out a lot of weak hands during that process, while offering much more attractive yields for long term investors.  Yields that are high enough where bonds can now provide a risk off hedge to equities once the rate hike cycle is done, which looks to be less than 3 months away.  Due to my pessimistic view on global growth, and even US growth, I lean towards the bullish side on bonds in most situations.  I definitely underestimated the inflationary effects of all that Covid stimulus but its looking like most of that has worked its way through the system.  With prices already having gone up a lot in 2021 and 2022, the base effects for inflation prints will favor disinflationary views over those who think inflation remains sticky in 2023.  The M2 money supply has been dropping steadily in 2022, which is rare to see.  I don't see a wage price spiral happening when the supply of money is no longer increasing and when the demand for workers is dropping as the economy gets weaker.  When the economy weakens, workers have to worry about potentially getting fired, which reduces their wage bargain power, and you have fewer workers switching firms, another source of wage growth.  

Lately, the yield curve has gone into a super inversion.  2-10s are trading -83 bps.  Look at the move in 1-10s, historically extreme:

Take a look at when the 1-10s spread went into negative territory, a sign that the Fed is overtightening and about to push the economy into a recession.  1989, 2000, 2007,2019.  They all resulted in sharp curve steepenings as the Fed aggressively cut rates in all 4 cases.  I expect a similar outcome this time around.  In fact, with the curve that much more inverted now, the curve steepening move will be vicious.  I am still seeing most fixed income analysts call for the Fed to keep rates high and not cut in 2023.  So betting on aggressive Fed rate cuts for the 2nd half of 2023 is both an out of consensus view, and also not priced into the SOFR futures curve as Dec 2023 is trading at 4.38%, which is only 52 bps lower than the 4.90% terminal rate pricing in Mar/June 2023.  The risk reward is quite good in the short end of the curve at current levels, although timing it will be important.  The roll up in yields is extreme at the short end of the curve, so the negative carry for being long 2s and short 10s is almost 40 bps/year.  That is a big chunk to pay out for a curve bet, but it should pay off big when the Fed enters a rate cutting cycle.

From the daily headlines, CNBC, and Bloomberg, slowly more are becoming aligned to the recession view, and that's part of the reason you are seeing the big rout in crude oil even as US inventories keep going lower and China loosens it Covid policies.  There has been heavy liquidation of long positions in Brent and WTI futures over the past couple of weeks.  With the curve going from backwardation to slight contango, systematic commodity traders are reducing longs and adding shorts. 

In trading, sometimes the market just induces you to take a position which you never thought about taking so soon.  The big drop in crude oil this week is piquing my interest.  Even with the short term cyclical headwinds and demand weakness that is sure to come down the pike, at a certain price, the risk reward turns positive for buyers.  We are probably already at that point, but I will wait for an even better level.  This is a seasonally weak time of year for crude oil, and there are still residual bagholders who still cling on to hopes of $100, $150, $200 oil.  There are plenty of barrel counters who are besides themselves trying to figure out why crude keeps going lower as crude inventory levels go lower, amidst China reopening hopes.  That has kept me away from the long side.  But I'm noticing that some of the permabulls are softening their bullish rhetoric.  Oil stocks have massively outperformed the commodity in 2022, so if I play for a long, it would be in oil itself, not oil stocks.  Something that is on the radar.  

Closed out part of the NDX short yesterday in the premarket, and will look to close out the rest today.  Finally got that big spike in put/call ratio to 1.17 yesterday, and noticed that the fear was building up watching CNBC.  After today, probably will not play the short side in NDX or SPX until after Christmas, as I see little edge shorting during a seasonally strong period of the year, and ahead of CPI and FOMC, which probably will result in a relief rally.  Even though I think SPX will go up next week after the big events are behind us, I will not play the long side.  The levels just aren't attractive and there is rug pull risk in the unlikely case that Powell puts back on his hawk costume or you get a hot CPI.  I will let others fight those battles.  Its still a swing trader's market in SPX.  If we get a big rally after the CPI and FOMC, then we can talk about taking longer term short positions later in the month.  Especially in tech.  Until then, letting the market come to my buy or sell levels to put on positions.  They need to induce me to take a position by getting to an extreme, because there is nothing that's really attractive at current levels.

Retail Getting Bagged

The post bubble environment is playing out and the winners and losers are becoming clear.  The winners:  energy, pharma, healthcare, utilities.  The losers: mega cap tech (GOOG, AMZN, META, TSLA) software, semiconductors, speculative tech (EVs, ARKK favorites).  The worse performing names:  AMZN, GOOG, TSLA, NVDA, ARKK, etc. are heavily owned by retail investors.  The best performing names are not:  XOM, OXY, MRK, LLY, XLV, etc.  

The stock market has managed to do what it always does:  punish the uninformed who come late to the party and crowd into the most popular and overvalued names.  Let's take a look at 2 of retail favorite ETFs:  TQQQ (3x leveraged Nasdaq 100) and ARKK, vs 2 of the best performing ETFs: XLE and XOP.  

Inflows into QQQ, TQQQ, and ARKK, and outflows from XLE and XOP.  Yet, the performance is the complete opposite of the investor flows.

While you've seen a big rally off the October lows for the SPX, you haven't much of a bounce in ARKK or even in TQQQ.  

The most overowned stock among retail, TSLA, is acting the weakest among the megacap tech names.  It still hasn't even been able to get back above the October lows, when the overall market bottomed.  Its quite clear that there is a drastic reduction in demand for concept stocks that are massively overvalued with weakening earnings outlooks.  About the worst combination you can get for a stock.  Would not be surprised to see TSLA perform even worse in 2023 than in 2022.  Look at the low institutional ownership, which means that retail ownership is huge, uncommon for a stock with a market cap so big. 

 The heavy participation of retail investors, who are still heavily invested (they got diamond hands!) is a classic symptom of a market that is saturated and likely heading lower.  From 2008 to mid 2020, retail investors stayed away from the stock market, as equity fund outflows were the norm.  Only in the past 2 years has that changed.  The millenials, probably the dumbest generation of investors, finally had enough of sitting on the sidelines and finally piled into the bubble stocks (FANG, EVs, ARKK, meme garbage) en masse in 2021 to catch up.  Not only that, they also piled into cryptos, looking to get rich quick.  The end result is a bubble that's now popped, with retail bagholders littering the landscape.  The wealth effect is real for these millenials.  They are the ones with the most propensity to consume yet have been hit with the biggest losses.  This is not going to help with household formation in the coming years.  Add to the much higher mortgage rates and house prices that still haven't come down much and you have a shit sandwich for the millenials.  

Last Wednesday, Powell dropped his hawk act and showed his true colors.  Its not easy putting on act all the time, especially when the incoming econ. data doesn't support it.  Powell either had to lie through his teeth to try to forward guide a much higher terminal rate to keep the stock market down, or just be honest and admit that looking at lagged data to keep hiking rates is asking for trouble.  Powell seems to be over the  hawk phase of his act, and finally telling people what he really thinks.  He's afraid of overtightening, and is still going for that soft landing.  Although its highly unlikely that there is a soft landing, he'll probably soften his tone for none other than political reasons.  

He is already feeling some heat from the Dems for being too hawkish, and he's a guy who tries to please politicians.  He's the farthest thing from Volcker, no matter how much he wants to be revered like him.  The sooner he drops his infatuation with being the next Volcker, the less pain the economy will feel in 2023 and 2024.  But its probably already too late.  This is nothing like the late 70s, early 80s.  The secular stagnation and debt dynamics are total opposites of that time period.  The yield curve inversion and the leading indicators have already baked in a mild recession.  I can't picture Powell getting ahead of the curve, and he'll probably just be reactionary as always and be late as a result, panic cutting in big chunks in the summer/fall of 2023 to try to stave off a huge rise in unemployment and a big economic slowdown.  

I put on a small short NDX position on Thursday, and am looking to add to the position on Monday.  The market seems to be struggling here as we approach that much talked about SPX 4100 level, which seems to be the target for a lot of short term bulls.  With CPI and FOMC, along with a bunch of central bank meetings next week, it would fit the pattern of a pullback ahead of the events, and then probably a rally after the events are behind us.  So looking for a pullback later this week.  Not sure about levels, but probably the best time to cover will be Thursday/Friday. 

Zooming Out

The markets have slowed down considerably since the big CPI rally.  There is a short term equilibrium in the market, and volatility has compressed.  Its during days like this where its good to take a look at the long term picture of various markets and stocks.  It only confirms that there was a big change that took place in 2022, that we had a big bubble pop, and given how big the previous trends have been, its a very significant change in the markets.  

Despite all the talk about investors, in particular hedge funds being very bearish, its good to take a look at the % of net worth in equities and bonds for US households.  

Households are very underweight bonds from a historical perspective, at the lowest levels in the past 40 years.  Contrast that with equities, which is near historical high levels.  The overweight in equities and underweight in bonds points to a high probability that equities will be underperforming bonds for the next several years. 

The SPX has appreciated a lot over the past 5 years, and even with the bear market in 2022, its still at elevated levels.  Earnings have improved, but a lot of that was the massive Covid stimulus in 2020 and 2021 pumping up the bottom line.  Without a continuous stream of stimulus, these earnings levels are unsustainable.  With a recognition that inflation is no longer something that is always transitory in nature, valuations have to reflect a Fed that will be more cautious going to ZIRP and QE.  They will go back to that well when things get really bad, but I don't expect Bernanke type policies which used QE frequently and freely even when the economy was stable and growing.  That should automatically lower the fair level P/E levels for the SPX, especially when we are basically in a zero real organic growth environment. 

Take a look at TSLA and AAPL, the faces of the everything bubble.  Still very extended technically from a long term view, and overvalued from a fundamental view.  Estimate of fair value in this new environment is $30 for TSLA and $80 for AAPL. 

Let's take a look at the bond market.  The 2 year yield is at the highest level since 2007, and holds long term value at these levels.  If you assume that the real growth rate (with neutral fiscal policy) for the US is close to 0, and inflation will be determined by fiscal policy (unlikely to have big stimulus for next 2 years), then long term fair value is probably close to 2%.  Of course, 2 year yields are priced off the forward curve of Fed funds rates for the next 2 years, but from a longer term view, these high rates are unsustainable when nominal GDP growth goes back towards 2%, which I expect in the coming years.  You can't hand out 4.5% risk free for very long when the nominal growth rate is 2%.  Secular stagnation never went away.  It was just papered over by massive fiscal and monetary stimulus in a big overreaction to a pandemic. 

I am sensing a shift in the market view on bonds since the CPI report came in lower than expectations.  The pentup demand for duration has been building up as investor outflows and Fed jumbo hikes scared fixed income investors.  Now that they see light at the end of the hiking cycle tunnel, that demand is slowly being unleashed.  Investors are now more willing to go out on the yield curve to lock in decent yields for the next few years.  Fundamentally, if you are expecting a recession, there is no better way to express that view than to be long bonds, especially the belly of the curve, which is the most sensitive to economic conditions.  The leading economic indicators are showing a drastic slowing in the economy for 2023:

This is looking very similar to early 2001, another post tech bubble environment, but I expect a worse outcome.  The LEI levels are similar, but Greenspan was aggressively cutting in 50 bps chunks during that time.  This time, Powell is aggressively hiking while the LEIs are in the same spot. What's even worse, is that the natural growth rate of the economy was much stronger in 2001 than it is now.  It was a younger demographic with stronger population growth and a strong increase in productivity due to rapidly increasing computing power and the growth of the internet.  So it should be a much worse recession than in 2001.  My base case is that the Fed has to cut rates down to 1% or below over the next 2 years to have any meaningful stimulative effect on the economy. 

The bull case that I am hearing is year end seasonality (very soft edge), strong consumer balance sheets (its getting weaker and weaker), and strong labor market (will get much weaker as recession hits).  Those are 3 temporary factors that will quickly dissipate in 2023.  So its hard to embrace the bull case, especially when there is still a big overweight in equities over bonds for US households, with much more inflows into equity funds than bond funds in 2022.  

Looks like I missed shorting the top of the rally last week, being too patient.  At SPX 3975, I see no short term edge shorting, so I will abstain.  If the market rallies back from here towards SPX 4040-4060 zone, I will put on NDX shorts looking for a 400-500 point pullback in the NDX.  Not going big game hunting yet, as I expect a narrow range over the next several weeks.  

On China: its a tempest in a teapot.  Human nature never changes, and the overreaction to social unrest will always be present.  Whether it be Zero Covid protests, BLM protests, French yellow vest protests, Greece austerity protests, etc., they don't affect the market.  They are an entertaining sideshow for news junkies that can't ignore the latest headlines and always have to put in there 5 minute expert take on the subject.  

What is exciting doesn't affect the financial markets for long (geopolitics, social unrest, etc.).  What is boring does (fiscal and monetary policy). 

Profit Margins

The big driver for corporate earnings for the next 10 years will be profit margins.  Revenue growth will be hugging zero + inflation, as demographics is destiny, and there are no new technological innovations that will boost productivity.  If there is something new that is a game changer that appears in the next 10 years, it will take another 5-10 years for that to really affect the GDP numbers.  The lack of energy supply growth is also a limiting factor for future global growth, as energy is the building block for all economies.  

So what are the main drivers of profit margins?  Its mainly 3 things:  pricing power, labor costs, and interest rates/taxes, in that order.  Obviously if you don't have pricing power, that really kills your profit margins as you can't collect as much for the same product.  In the U.S. in particular, the lack of antitrust enforcement has allowed a huge amount of concentration in various industries.  This has allowed for corporate profit margins to keep rising even as economic growth keeps shrinking.  Corporate welfare is the default stance for politicians as the corporations play a huge part in financing the campaigns of politicians on both sides.  Corporate lobbyists have huge influence and are the reason corporate tax rates are the lowest in the past 50 years.  They also ensure that corporate tax loopholes remain open and unchanged.  Corporate profits as a percent of GDP is at the highest levels in the past 75 years. 

Pricing power is one facet of profit margins that is the most bulletproof, as the politicians are bought and paid for by corporate America, so its unlikely that antitrust legislation will gain any traction unless there is a revolution from the masses.  The average person is uninformed about the tax code, or the laws that are not being enforced by the government to prevent monopolies and collusion.  So the cause of their lower living standards and higher costs for goods and services is shrouded in a veil that few are sophisticated enough to dig into.  Its just easier to blame the other party for inflation and a lower standard of living. 

Next comes labor costs.  Labor is the biggest expense for most corporations, so it has a notable effect on corporate profits.  Corporations want to pay the least they can get away with while still retaining workers.  The lack of competition is a key factor in keeping wages down, as there just aren't many different places to find similar work for a lot of workers.  Also outsourcing to cheaper labor countries like China keep wages lower as corporations are very willing to go overseas to keep labor costs down.  But the balance of power which has been heavily skewed towards corporations is slowly shifting.  The lack of labor force growth in the G7 and China is giving workers a bit more bargaining power as labor supply is unable to keep up with labor demand.  

Quiet quitting and work from home wouldn't even be a thing unless workers had confidence in getting another job if they got fired.  The aging population ensures that the labor force will continue to shrink even if the population remains stable, as more people drop out of the labor force due to retirement.  

This shrinking labor pool hurts corporate profit margins in 2 ways:  companies have to pay more for the same job, and they are getting less productive workers because they are working from home/quiet quitting/less qualified.  

The last factor is interest rates/taxes.  Corporations as a whole are net borrowers.  So higher interest rates on corporate bonds hurts the bottom line.  If we are to assume that the structural energy shortage and profligate fiscal policy due to populism are secular trends, then you are likely to have higher interest rates in the future than you did from 2008 to 2021.  That increases interest expense, which hurts profit margins.  And corporate tax rates are at 21%, the lowest in 50 years.  Its very unlikely they will be cut further.  Its much more likely that they are increased in the future as the budget deficits keep getting bigger.  That would reduce profit margins for almost all corporations.  

Inflation has mostly come from an increase in corporate profits rather than an increase in labor and nonlabor input costs, as most assume.  This shows you how much pricing power corporations have in the U.S.

So pricing power likely remains a constant, labor costs are likely rising, and interest rates/taxes are likely rising compared to the past several years.  These are things that long term stock investors need to take into account when trying to estimate the forward returns on equities over the next 10 years.  It just makes me more of a bear on stocks from a fundamental perspective, which are already unfavorable due to historically high valuations.  

It looks like we are getting more bulls on board the year end rally bus.  It feels like its getting a little bit crowded.  I am still not short yet, but its getting quite tempting to put on a starter position.   The post holiday doldrums could hit this complacent market next week.  I have noticed that the Nasdaq has been lagging badly for the past 2 weeks.  It appears that the money flows are now going out of tech and into anything else but tech.  I expect that trend to continue for the next 12 months.  Its the dotcom bust all over again. 

No Organic Growth

One of the habits of financial markets is extrapolating short term trends well into the future.  Remember 2021, when the Fed was assumed to be stuck at zero until 2024 and financial repression would continue for years and years?  Now in late 2022, almost everyone assumes that the Fed will be higher for longer, keeping rates at a restrictive level for all of 2023 and well into 2024.  Its a bizzaro world out there.  Rear view mirror forecasting while ignoring the prior misses using that same forecasting method. 

In order to maintain restrictive rates for a long time, there needs to be growth. Where will the growth come from?  The fertility rate is steadily dropping in the G7 nations and China.  The main source of world population growth, Africa, is basically an economic non-entity.  Here is the population growth rate for the US, the big 3 in the Eurozone (Germany, France, Italy), and China since 1970.  

United States population growth rate

Germany population growth rate

France population growth rate

Italy population growth rate

China population growth rate

Notice the steady downtrend for the past 5 years for all of the countries above.  The U.S. population growth rate is now around 0.3%/year.  Immigration has dropped dramatically in the U.S.  In Germany, France, and Italy combined, there is negative population growth.  China has steadily declined and is now at 0, and falling the fastest of them all.  In all the above populations, the demographic is getting older, reducing the current labor force and potential labor force in the coming decade.  Its a recipe for very low growth.

The GDP equation is as follows:  

The 3 key inputs for GDP growth are productivity, capital, and labor.  With work from home and an aging population, with no new breakthrough technologies since the internet, productivity is flat to down.  Capital is no longer cheap or readily available with the Fed jacking up interest rates and reducing the money supply.  And with an aging population and near zero population growth in the biggest economies in the world, there is no growth in the labor force.  Basically, you have zero GDP growth without a surge of cheap capital in the form of fiscal and monetary stimulus.  Without stimmy, no growth.  Its that simple.  

Secular stagnation is the baseline, and whatever artificial means are used to shake the patient from its stupor are the exceptions, not the rule.  The 2020-2022 economy running high on stimmy is over.  Sure, there will be stimmy coming back, because populism is here to stay, but its not coming back in the US anytime soon.  With gridlock until the end of 2024, the Republican base will not help Biden/a Democrat get re-elected by pumping the economy.   So odds are very low for any new stimulus in the next 2 years.  That's 2 years of being drug-free for this stimmy addict of an economy.  The withdrawal pains are being vastly underestimated.  The patient will be screaming for another dose to get rid of the hangover as he's crashing down from his biggest rush ever.  

I am sympathetic to the secular inflation case because odds are high that the politicians will keep going back to that money well when things get hairy, and that will ensure future inflationary waves.  But since inflation is a rate of change statistic, it will not stay at a high level for long if the governments and central banks aren't continuously printing.  And the coming downward cyclical forces are so strong that it will overwhelm the structural energy supply shortage. 

Without the buffer of a naturally growing economy from population growth and/or productivity growth, the economy will not be able to handle a Fed funds rate at 4-5% for long.  Its already showing signs of weakening and Fed funds isn't even at 4% yet.  Powell who is smarter than he sounds, is just following the safest path politically, which is to act like an inflation fighting hawk when inflation rates are high.  He needs an excuse to change his rhetoric, either in one of 3 ways:  1) a big drop in stocks/blow out in credit spreads 2) a much lower CPI 3) much weaker nonfarm payrolls numbers.  

I thought a big drop in stocks or a much weaker credit market would be the first thing to break, but they have held up well, as investor psychology is still very much in a buy the dip mentality.  So it may have to be much weaker nonfarm payrolls numbers that gets the Fed to relent from its hawkishness.  The CPI works with an even bigger lag than the NFP, so its going to be the last thing to show that the economy is in a recession.  Considering how important housing is to the economy, the higher yields will have a much bigger effect in 2023 than currently, as the downstream effects of a housing freeze will flow through to construction and durable goods demand.  This will have a notable effect on the jobs numbers in the coming months.  

I hear many five minute stock market experts calling for a year end rally, talking about how underperforming fund managers will be chasing for performance, talking about positive seasonality, etc.  Valuations are still too high considering the high level of yields.  The fundamentals are horrible.  Shorting overvalued tech stocks around SPX 4000 feels like shooting fish in a barrel.  Looking to reload on tech shorts at higher levels as the Thanksgiving holiday cheer tends to get investors bullish. 

Collision Course

The dead horse is coming back to life.  The bond market is no longer getting bullied by hawkish Fed rhetoric.  In fact, its starting to flat out ignore any of the hawks who insist on using forward guidance to price in higher rates further out on the curve.  2-5s are inverted by 50 bps.  2-10s inverted by 65 bps.  This is not a long term sustainable situation.  It is amazing to see this level of curve inversion when you still have multiple hikes priced in the next few months.  Especially as you have been getting steady outflows from bond funds as well as the draining of liquidity from QT.  And the bond market is defiantly replying "balderdash" to Fed hawkishness by pricing in several rate cuts starting in the 2nd half of 2023 and even more in 2024. 

Its a battle now.  Fixed income traders vs the Fed.  They are on a collision course, with one side saying the Fed will cut in 2023 and the Fed denying it and talking of a higher for longer plateau.  I am siding with the fixed income guys.  They aren't perfect, but they have a much better track record of forecasting future rate moves than the Fed.  And the economic leading indicators are flashing red.  

Just doing basic macro 101 analysis will tell you that a steep inversion in the yield curve, especially towards the front end, is a warning sign of a coming recession.  Add to all the demand that was used up to buy "stuff" in 2020 and 2021 and you have a consumer that is no longer in a rush to buy goods.  As for services, that post Covid pentup demand was released in 2022, and will go back to normal levels in 2023 and beyond.  

The excess savings are steadily being used up, as inflation and the negative wealth effect take their toll on the consumer.  With gridlock guaranteed after the Republicans taking the majority in the House, there will be no big stimulus packages coming down the pike.  Without fiscal stimmy, the secular stagnation theme will come back with a vengeance.  After all the talk about free spending governments, with gridlock the next 2 years, you are likely going back to monetary policy being the only game in town.  

And when the Fed has to try to make up for weak growth with loose monetary policy, they usually overdo it, because they can't help themselves.  Sure, they say they won't backstop financial markets, but its one thing to say it now, before the economy turns sour.  But when things get ugly, they've always come to the rescue.  Its in their mandate.  Its what they do.  

The more the Fed tries to fight the bond market with hawkishness, and more rate hikes, the more quickly they bring on the pain point for the economy, forcing a quick turnaround from hikes to cuts.  The rate hike path will be more like the Matterhorn than a big plateau.  

We have been pulling back after that euphoric pop on a weaker PPI number on Tuesday, as nervous shorts and underweight longs were afraid of another CPI like day. I took advantage of the strength to put on NDX shorts.  If we get a further pullback this week, I will cover to re-deploy shorts on the next rally.  The strength in the bond market and dollar weakness should prevent any big rug pulls for the time being, so I won't get greedy looking for a big down move.  After a couple more weeks of bulls coming on board, by early December, that should be the time to put on a bigger short and with lower price targets.  Staying nimble for now, no need to dig in the trenches for a long war.  Just quick strikes on the short side until I see more of a saturation of bulls. 

Dotcom Bust 2.0

To figure out the future, you have to study the past.  Things never play out the same way, but there are general tendencies in the financial market.  The main template for the current time period is not the 1970s inflationary period, or the 2007-2009 financial crisis period, but the late 1990s/2000 dotcom bubble.  The 2 main ingredients that you saw only in that bubble and in this bubble was the extreme greed in chasing the riskiest investments (2000: internet stocks.  2021: bitcoin, meme stocks, EV/speculative tech stocks), with widespread popularity in stock investing and daytrading.  You never saw that in the 1970s or in 2007.  The sheer amount of assets that poured into the stock market not only through equity funds but through direct investments by retail, is eerily similar to 1999/2000.  

The extreme bubble valuations in this everything bubble is only rivaled by the peak valuations during the 2000 bubble.  Valuations are not a great timing tool, but they are a great measure of the amount of expected return for playing the long or short side.  The higher the equity valuations, the lower the long term expected returns, and vice versa.  Its all common sense, but the big picture is often forgotten as we focus on short term price movements, earnings, the latest Fed speak, economic data, etc.  

So going by the dotcom bubble template, the Nasdaq topped out in March 2000, and made the final bottom in October 2002.  That is 30 months from top to bottom.  If you look at this Nasdaq bubble, it topped out in November 2021 and if it were to follow the same time frame as the dotcom bubble, the market would make a final bottom in May 2024.  Now I don't think it will take that long to go down to the final bottom, but its a possibility.  It gives you an idea of how long the bear market can last if it just follows the normal post bubble course of action.  My best guess would be a bear market that lasts until late 2023/early 2024, so about 2 years in length.

Let's take a look at the waves up and down in the Nasdaq 2000-2002 bear market.  

Nasdaq Jan. 2000 - Dec. 2002

If I were to guess where we are in the bear market relative to 2000, it would be around November of 2001, after a sharp rally off the 911 lows in September.  That rally and subsequent sideways chop lasted for 4-5 months before it gave way to an absolute bull killer of a downtrend that lasted 6 months from the bear market rally high in January 2002.  

With the dollar dropping sharply in the past week, it looks like the US dollar uptrend is in for a long period of consolidation, which likely means we are in a long period of consolidation for the equity market before the final down wave which is always the most brutal.  I could see that starting in the first quarter of 2023 and lasting till the summer.  This post CPI move should not go much higher, as I don't expect a Mt. Fuji formation of straight up and straight down.  It will likely be more of a Alps mountain range of gradual tops and bottoms for a few months before the bottom falls out and we enter a long downtrend that will eventually lead to a capitulation by the bulls.  We could be trading in a narrow range from 3800-4050 for the next 3 months. 

I expect the bond market to be strong in 2023 as inflation slows down and the recession becomes more clear in the economic data.  That should be supportive for equities initially, but when the economy really starts to slow down in the spring/summer, entering a deep recession (don't believe the shallow recession predictions), you will see bonds and stocks going in opposite directions.  I agree with the long term secular inflation theme due to the populist wave of politicians that love to deficit spend to buy votes.  But the disinflationary forces of a deep recession will make people forget about inflation for the next 12 months. 

Bottom line, there is still a long ways to go for this bear market, and it appears the first phase is done, and before you transition to the next phase, usually you will see a long consolidation of the downtrend to build up potential energy for the final big down move which usually leads to the bulls throwing in the towel in despair.  

Still not short yet, don't have a lot of confidence that we'll get a sharp move lower anytime soon.  At the same time, don't think we'll get a continual squeeze higher, although a minor overshoot above 4000 towards 4050 is definitely possible.  After studying the charts and looking at the 2000-2002 bear market, I will only be shorting NDX and tech stocks.  Expecting continued underperformance for tech stocks for several months.  Am long some Treasuries to play for a sharper economic slowdown than most expect.  Will look to start a small short in NDX and tech into any strength this week. 

Greed is Still High

That was a savage face ripper.  Not only did it rip the face off the shorts, it also poured acid right afterwards.  In no way am I buying into the post CPI rally, you don't change your mind based on one day.  All the research and analysis remains the same.  They say all the work is done leading up to game day.  During the game, its just running through everything that you prepared for.  Yes, inflation has peaked, and will go down more rapidly than the general consensus.  That is bullish for bonds.  But not necessarily bullish for stocks.  Especially if the Fed doesn't respond to the lower inflation with rate cuts.  Based on how entrenched Powell has put himself into the hawk corner, he's not going to cut rates before CPI hits 2% until stocks go down meaningfully (SPX under 3300) or the recession really hits the jobs numbers and/or credit markets.  It looks like barring a huge drop in the stock market or a crash in jobs numbers/CPI, 50 bps is a lock for December.  That takes Fed funds effective rate to 4.35%.  If NFP and CPI and stocks don't go crazy to the upside, he could raise one last time in February to 4.60% and pause there.  But the stock market will not be satisfied with that outcome, especially with QT running in the background, sucking out liquidity. 

So how can it be bullish for bonds and not for stocks if Powell remains intransigent and refuses to cut rates from the terminal rate as CPI inflation steadily heads towards the 2% target?  Its because the economy will get weaker than many expect and that will result in much lower earnings and a sharp cutback in stock buybacks.  The financial markets appear to be on the cusp of a reversion to the negative correlation of stocks with bonds.  That is what has happened during all the major bear markets in the last 40 years during a recession.  Even if Powell tries to fight the bond market by refusing to cut rates in 2023, the bond market will have all the data that it needs to build its case for Powell to eventually cave in to its demands.  And it will not be shaken by a hawkish Powell, instead, it will just bide its time waiting for the lag effects of higher rates, less money supply, and negative wealth effects to work its way through the system, day by day.  Housing construction will be a in deep freeze in 2023, lopping off a huge chunk of demand.  

The one big takeaway from yesterday's reaction to the lower CPI is that investors are still quite greedy despite all the so-called bearish sentiment.  The SPX going up 208 points in day when it wasn't even that oversold tells you how eager investors are about catching the rally.  It is days like yesterday which keep me cautious about being short ahead of much feared economic data releases.  Yes, it works out well to short some of the time, but usually its better to be safe than sorry.  Especially when the last 2 reports led to immediate huge drops in stocks.  The market has a habit of catching investors off guard when things have been going one way for so long.  

A word on crypto with the FTX debacle.  Jon Corzine was not an outlier.  There have been rogues who can't resist the temptation to dip into customer funds/bank capital to make huge bets.  SBF just could get away with it for longer because he was in the wild wild West of finance.  Cryptocurrency trading is just a giant casino with few rules and shady owners with a few big sharks roaming the waters and tons of little fish coming in, which continually feed the sharks.  It was marketed as a way to invest in the Fintech Defi revolution, but its really just a way to gamble online on the most volatile asset class out there.  In the end, really the only ones that make money in the enterprise are a few savvy sharks, the exchange operators who are trading against their own customers, using old fashioned bucket shop stop runs to wipe out overleveraged accounts and collect their cash, while collecting on commissions at the same time.  And if they feel like they can get away with it, they'll just steal customer money.  After all, there are no repercussions except the cries from the fleeced fish, who no one cares about anyway.  

Eventually bitcoin and all the other cryptocurrencies will be relegated in the history books as a symbol of the immense greed of these times, where speculators would believe almost anything in order to get rich quick.  Based on everything that I see out there, there is no way that you are going to get a sustained rally higher under these conditions of irrational greed despite a year long downtrend.  If I were to use an analog, it would be the dotcom bubble period from 2000 to 2002.  We are in the November 2001 period, after a big post 911 rally, facing another horrible 12 months to come for the stock market.  But this time, unlike in 2001, the Fed is still hiking and taking out liquidity.  It can be argued that this bear market could get even uglier than the dotcom bust, but the central banks cannot stomach that kind of pain.  Finance is too politicized and populism is too rampant for the free market to operate unencumbered.  There is an uncle point that they will reach, when even a few rate cuts aren't enough, and the stock market will be begging for more rate cuts in order to stop going down.  And they will have to deliver them.  The stock market will hold the central banks hostage by threatening to suicide bomb the whole financial system in order to get more rate cuts.  That's when things bottom, not when investors think stocks will rocket higher when the Fed pauses hikes.  

Cautiously waiting to see what happens going into monthly opex, it is tempting to start a short here, nearly at 4000, after such a huge move higher.  But remembering what happened 3 months ago in the last opex week when the market was ripping towards 4300, you often get tops at those gamma squeeze moments occurring due to monthly opex.  That would be the ideal setup for a low risk short.  Almost there, but I'll probably wait until early next week to start the short campaign just to be on the safe side.  And it will probably be with a mix of short SPX, NDX, and long the belly of the curve in Treasuries.