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.