Wednesday, October 7, 2020

Fiscal is the New Monetary

 Monetary policy was really the only game in town from 2000 to 2016.  Fiscal policy was tame, small, and lacked the eff-you factor that the Fed has had since 1987.  

The Fed could care less about precedent, about sticking to conservative views of monetary policy.  The lack of bubble fighting in the late 1990s and the turtle like pace of rate hikes under Greenspan in the mid 2000s.  The ridiculous and continuous amounts of QE under Bernanke.   The turtle like pace of QE purchase tapering under Yellen.  And the $75 billion per DAY of QE (that's a $1.6 trillion per month pace!) under Powell during the beginnings of QE infinity in 2020.  

The Trump tax cuts paid for by nothing in 2017, along with a big increase in the government budget was the beginning of the end of conservative fiscal policy.  Now the Republicans are spending almost as much as the Democrats but without the tax increases (rather, its tax cuts) to pay for it.  And now the fiscal response to Covid with $5 trillion in spending financed by the Fed's QE over 6 months is straight out of the Bazooka Ben playbook.  Moar.  

Yesterday's tweet bomb from Trump is not going to matter in the long run, because it does mean less fuel for the economy till at least January.  With Biden building up an even bigger lead in the polls after the first debate, it looks like the election is pretty much a wrap.  All that is left is to see how Trump reacts to being told he lost.  Will he rant about election fraud and try to persuade his governor buddies in the swing states to take the case to court and pay off some judges to get a favorable verdict?  Will he try to take it to the Supreme Court and hope that the conservative judges will rule in his favor?  That is about the extent of the uncertainty for now.  

One thing is for sure, he won't sign off on a stimulus package that the Democrats will want if he loses the election during his lame duck period.  That means there likely won't be a stimulus package passed for at least another 4 months.  And the virus hasn't gone away, so that could spell short term trouble for the markets. 

Election uncertainty is still there.  If there is no Dem sweep, with Biden winning and Republicans holding the Senate, that fiscal stimulus package that Biden wants to pass is going to have to get much smaller in order to pick up Republican votes in the Senate.  So that would be a negative for the market, which is jumping the gun here and thinking that the election is already over and that Democrats will dominate.  A lot of independent voters may hate Trump, but it doesn't mean they hate Republicans or like Democrats.  It is possible that Biden wins but Republicans hold their own in the Senate races to form gridlock on Washington, something the market absolutely doesn't want.  

We have a what me worry? gap up in the SPX after the big drop in closing hour yesterday.  I am half in right now on the short side in SPX.  Depending on the price action, I may add 1/4 more later this week and then the last 1/4 next week.  Market is quite complacent now so its going to take a bit more shaking before the bulls retreat.  No rush to add here, but do have plans on adding more under the right conditions.

13 comments:

MM111 said...

Already feeling like a short trap.

soong said...

We've already seen 2018 Feb~Mar, 2018 Oct~Dec.

And then Repo Run 2019. = FED 물타기.
(음.. 물타기가 영어로 뭐죠..?)

That 물타기 makes moar moar hyper Buble.

as a result, we've seen 2020 Feb~Mar.

Now, 2020 Oct.
There's never been a single event in history in the market, and it's happening endlessly.

Whatever we imagine, we'll see moar than that.

soong said...

I remember J.Powell's 2018 dec action.
He's a dick. Oh, he's a moron again because of Trump's insanity tweets.

So, originally, today's FOMC had little impact, but there was a possibility of a nuclear bomb being detonated since yesterday.

By the way, it's a crazy market right now.

MM111 said...

So now trump wants the stimulus package. Erractic much.

Market Owl said...

Trump wants a piecemeal stimulus, not the big bazooka package that Pelosi wants. If that's all that gets passed, then that's not really much of a boost to the economy, maybe $200-$300B of stimulus.

Market is quite resilient and still hopeful for stimulus ahead of the election. It seems delusional to me, I have a hard time seeing the market just going up in a straight line into the election. Not enough bearishness out there considering the events ahead.

OL DAWG said...

Sold SWBI calls. Long CNK calls.

MM111 said...

100 points turnaround in 24 hours. Above 3400. New highs likely.

Market Owl said...

I am adding shorts tomorrow if we have another up day.

Dan F. said...

SPX has gone higher than expected, breaking through the 3400 barrier to 3430 yesterday. Are you placing trades for both 3220 and 3130 or just going for 3220?

Market Owl said...

I don't think its going to 3130. Not enough time ahead of the election for that to happen, as I expect a rally starting about a week ahead of the election. 3220 is a possibility, but even that might not hit. I do think 3250-3260 will be hit sometime in mid to late October.

I'm only bearish for the next few weeks, after that, looking out from November to the end of the year, market looks like it will go higher, probably making all time highs in December.

Anonymous said...

Is it time to short SPY for a quick trade @marketowl or would you wait for a bigger spike closer to 3500?

MM111 said...

FTSE firming up too. This was one hell of a bear trap. Not interested in seeing this go back to highs. I'm out again.

Market Owl said...

I think Monday will be the day to short. Trump flip flopping on stimulus is giving market hope again, but at these levels, see at most 50 spx points upside and 200 points downside for October, so goo drisk reward for shorts,