From Dove to Hawk Powell

Not me.  Them.  The majority of fund managers, controlling trillions of dollars who still can't get their head around the Powell pivot.  This time, the opposite of January 2019.  From dove Powell to hawk Powell.  He wore the dove mask for nearly 3 years, so people get used to it.  So they don't believe he can change.  Oh yes, he can change.  

He wouldn't be sitting in that seat as Fed chair if he couldn't change.  He's the slickest politician in Washington, and he's not even considered one.  How else can you get all the Republicans to like you even when you buck against Trump, their idol, and at the same time, get support from most Democrats even though you are a Republican.  That's political skill.  When Trump was complaining about hawk Powell in 2018, as he was on automatic pilot with quarterly 25 bp hikes and QT, Powell was feeling some heat.  And Trump was complaining the whole time until the dovish pivot.  What did Powell do?  He had conversations and dinners with senators behind the scenes, scoring brownie points.  And he didn't respond to Trump, he basically ignored him, which was the best strategy.  A political master at work.  

Anyway, Powell has been reappointed and he's got 4 more years.  And politicians' new worry is inflation.  Which makes it Powell's new worry.  He's now an inflation fighter, after ignoring it for 9 straight months and brushing it off as transitory.  So yeah, you could understand investors' logic that he's not going to be hawkish.  After all, he's the same guy who kept the same dovish tune while the CPI was raging higher month after month.  But last year, politicians didn't really care about inflation, they were still looking in the rear view mirror and looking to pump out more stimulus.  And Powell knew that, and the safe choice for him to get renominated was to not rock the boat and keep QE going and do nothing, while inflation was surging.  But that started to change in the fall of last year, and Powell gradually changed along with it.  The tone has changed among the public.  They don't give a crap about Covid anymore.  Its inflation that is their main concern.  Because while the stimulus has stopped, the prices keep going higher, and they're not happy about it.  

M2 supply goes up $6 trillion in less than 2 years.  You print a bunch of money, and prices go up.  But none of the "experts" on TV are talking about that.  No, it must be those damn Chinese supply chains.  LOL.  You can't make this stuff up.  Truth is stranger than fiction.

So Powell has made a mess of the situation, totally butchered it but few were  complaining because the SPX kept going up.  He's so late with the hawkish pivot, that even with the Eurodollars and Fed funds futures pricing in more than 4 rate hikes in 2022, he didn't push back on it.  He seemed like a guy who didn't want to tell the market the bad news, about what he's really thinking, and instead gave the usual noncommittal mealy mouth word salad of a press conference.  He didn't want the market to crash, but he couldn't lie, so he said as little as possible, except that they were likely to hike rates at the next meeting.  And that a few rate hikes weren't going to hurt the labor market, which is like telling a baby that receiving this shot from a horse syringe won't hurt.  

Its odd.  Most of the time, the Eurodollars market is much less aggressive in pricing in rate hikes than the general consensus on Wall Street.  Its the opposite this time.  And that's worrisome.  The Eurodollars market is pricing in 5 rate hikes in 2022 and most of the equities investors think that's fantasy and impossible.  It seems most think the Fed will be lucky to get 3 rate hikes done this year without causing a stock vigilante like tantrum in the market to keep the Fed from hiking even more.  But Powell's next 4 years are secure, he's not going to be easily shaken from the hiking path unless you have a deep, deep selloff, probably down 20% or more, so the Powell put strike is probably around SPX 3700.  Even most fixed income investors are skeptical, slow to adjust to the new Powell, but not as slowly as the stock guys, who are completely out of touch with how hawkish Powell has become, and will be in the coming months. 

Which brings me back to the current psychology in the market. 

The five stages of grief are:

• denial
• anger
• bargaining
• depression
• acceptance
  

Its hard to believe after such a sharp selloff, but we're still in the denial phase of this selloff.  The next step is anger, which is probably either right before or after the March FOMC meeting.  You are not going to get a big rally when you are going from denial to anger.  There will be chop and likely another retest of the recent lows, around SPX 4220.  Considering how complacent many are about the number of rate hikes in 2022, I wouldn't be surprised if SPX went under 4200 on the retest, setting off some stop losses and more panic sells, before rebounding strongly.  

I feel uncomfortable when too many traders have the same ideas as I do.  Especially short term ideas.  I am hearing a lot of talk about how oversold the market it, how cheap it is, and about a bounce above 4500, many thinking up to 4600.   Then I see this:  

In a week when the SPX went from 4577 to 4356, speculators added a net 101K ES futures contracts to their longs.  The last time speculators got this long SPX was in spring of 2018.  The market chopped around for a couple of months and grinded higher for 4 months before topping out and entering a vicious decline in fall of 2018.  

Good stuff in this blog post from @HalfersPower, mentioning the low correlation selloff over the past month, and how similar that is to low correlation selloffs in 2000.  Future 1 month SPX returns were much lower in low correlation selloffs than high correlation selloffs.

Still long, but looking to dump underwater longs in the next 2 days.  Don't want to overstay the long side after a bounce.  Most of the research I've done over the weekend confirms my suspicion that we are in a post bubble 2000/ hawk Powell 2018 like environment.  Its not a time to get greedy, in my view, the bounce will be weaker than most longs expect.