Yellen > Powell

Yellen overshadowed her successor, Powell on FOMC day.  I've always felt that Yellen is a lot less dovish than her reputation.  Do you think Bernanke (or even Powell) would have gotten off the zero bound (the first rate hike in over 9 years) a few months after the SPX plunged 15% in a week, and with crude oil collapsing from over $100 to the $40s in the previous year?  She probably would have done a lot less QE than Powell did in 2020 and 2021, and would have likely ended it much sooner.  

I still don't know why some out there think so highly of Powell.  He's caved to the market to cut rates in 2019, which was unnecessary, considering the economy was nowhere close to recession.  And he overstayed his welcome with ZIRP and monster QE in 2021 with the biggest miscalculation since Trichet's rate hike in 2008, saying inflation is transitory and keeping ZIRP and QE going even with a booming economy with 6% inflation.  He started hiking  way too late.  And Powell's forward guidance has been more absurd than even Bernanke's, trying to forward guide 3 years into the future (said he would raise rates until 2024 in spring of 2021).  And now, Powell seems to be flip flopping like a day trader, sending out signals to the market via Nick Timiraos (last Friday) that he could pause if markets are weak heading into the FOMC meeting.  This is a week after leaning towards 50 bps due to hot CPI and NFPs the previous week.  He's wildly following what the crappy, manipulated data tells him. 

Yesterday, Yellen bluntly stated that she was not considering insuring all uninsured bank deposits.  That is NOT what the market was expecting.  With all the moves to rescue the two bit banks and pump more liquidity into the system, the market assumed that the Fed and Treasury were going to backstop all deposits.  After all, the financial markets have assumed that everything that could remotely cause systemic problems would be bailed out. 

Out of all the times that the Fed and Treasury have bailed out banks and institutions, they've only let one big one fail: Lehman Brothers.  And afterwards, they received a lot of the blame for the financial crisis because they didn't come to their rescue.  Ignoring the fact that the financial crisis was not caused by the Lehman bankruptcy, but by all the dog shit mortgages issued from 2004 to 2007, and the popping of the real estate and credit bubble in 2007 and 2008.  That real estate + credit bubble was global, as Europe also boosted short term growth in similar fashion.  Lehman was just collateral damage because they were holding the dog shit MBS/CLOs and other random crap on their books.  

One of the reasons that the market has shrugged off the SIVB and Signature Bank bankruptcies as well as Credit Suisse is because of how quickly the government and central bank came to the rescue with over the top bailouts which looks to be overkill for the situation at hand.  The Feds killed the bear not with a rifle, but with a bazooka.  That was comforting to the financial markets which forgot what it felt like to be coddled after hearing hawkish rhetoric for months on end.  But people forget that the markets have been coddled almost continuously since the LTCM debacle in 1998, as rate increases were slow and small, and rate cuts and QE were fast and big.  It is the reason that the SPX has been in overvalued territory for most of the 1998 to 2023 time period.  

That affirmation of the Fed put with the lightning fast bailout will be assumed to be the template for future financial conflagrations, a confirmation that the Fed put is alive and well, it just went into temporary hibernation.  While I lean bearish in the equity market, my bear thesis isn't dependent on financial contagion, a hawkish Fed, or sticky inflation, which is still what many fear.  My bearish thesis is purely cyclical, as in the economy will be weaker than what consensus is forecasting, because of the excesses of the previous cycle, where you had the biggest bubble in world history.  And the lagged effect of huge increases in interest rates in a highly leveraged economy that was addicted to zero rates, which nurtured tons of zombies, which are in a painful spot having to refinance debt at much higher rates.

That is why at this moment, where there is still some remaining fear of financial contagion and SPX down 5% from February highs, I prefer to express my view through a long bond position than a short equity position.  If the SPX was at local highs and there was more complacency and optimism among the crowd, a short equity position would also be worth taking.  With the high cash allocations among institutional investors, there is a lot of dry powder that can be put to work into stocks AND bonds.  So being careful about shorting stocks here.

We are seeing the return of the retail investor, as you are seeing meme stocks pumping again (GME).  NVDA is on fire.  And tech stocks, which are traditional retail favorites, have outperformed the broader market.  I expect that to continue as the Fed pivot to a pause becomes more clear in the coming weeks.  

Yesterday, you saw a very different Powell than you've seen since Jackson Hole.  He's put inflation on the back burner, and financial stability is the priority now.  He's not going to outright say that inflation is not their top priority, not with CPI still at 6%, but you could sense the lack of hawkishness in his press conference.  The SPX would have likely finished strong had it not been the bombshell that Yellen dropped on the market in some random speech which happened to be when Powell was speaking.   Despite the dot plot showing terminal rate at 5-5.25%, Powell didn't seem committed to another rate hike like he was in previous pressers.  And with so many in financial media saying that he shouldn't hike anymore, he's going to feel a lot of pressure at the next FOMC meeting to pause.  And we know from Powell's history, he has a history of caving into public/political pressure.  He's a politician first, central banker second.  It is the reason that he got re-nominated with an overwhelming vote in the Senate, politicians know how to work other politicians. 

Powell has broken the weaker regional banks with these rate hikes.  More rate hikes will only speed up the deposit flight from banks to money market funds.  And that will cause the banks to tighten their already tight lending standards that much more.  Pausing at 5% is sufficient to cause a steady flow of money leaving the banks towards the MMFs.  That money will be siloed in the Fed's RRP, so its not doing anything for the economy, unlike deposits which would be used by banks to either make new loans or buy MBS/Treasuries.  Deposit flight is deflationary.

The SPX seems to be range bound here, and realized volatility has not been able to keep up with the VIX levels lately.  Unless you see more near term stress in the regional banks (possible, but less than 50% IMO), SPX should probably grind higher from here into the seasonally strong month of April.  I have a lot of dry powder to put to work if we get rallies in some of these retail favorites which have been going up recently.  I see some traders (on Twitter) eager to put on shorts here, I think they are too early.  When they get squeezed out on further rallies towards 4150-4200, I will be there ready to put money to work.  Waiting for the bulls to get bold again to strike on the short side, it probably takes a few more weeks for that to happen.