The Grind Continues

You think they will let you buy that easily?  Over the past 2 months, since the SPX broke 4000, the consensus view among the market "experts" is that its gone up too much, too fast, its too frothy and speculative, and the market is due for a pullback.  I've mentioned before that the usual permabull Tony Dwyer, from CNBC, has been looking for a pullback since the 3900s in March.  He's just an example.  There are tens of thousands who think exactly like him.  They are usually wrong when they get bearish, counter to their permabull tendencies.  These active market participants, who bemoan the growth of passive investing, are badly lagging the indices again this year.  They are perpetual underperformers who criticize how dumb passive investing is, and yet fail to beat the S&P 500.  

The big wall of worry now is the Fed taper.  Its not even about when taper will start, its about when Powell will officially talk about tapering on some undisclosed time in the future.  If you are looking for a bear catalyst, the Fed will not be the ones providing it.  

Powell is so over the top dovish, even more so than that supposed owl, Lagarde of the ECB, and even more than permadove Kuroda of the BOJ.  He mealy-mouthed his way through the Congressional testimony, with more transitory inflation psychobabble, trying to placate the markets after the SPX had a 2% drawdown.  He felt the heat from a 2% drawdown.  LOL. 

Powell has officially taken the title of World's Biggest Dove.  He is just acting in his own self interest, as most people would.  Don't hate the central banker.  Hate the game that the financial markets and media have created so that doves are celebrated, hawks are criticized.  As a central banker, it never pays to be even slightly hawkish.  And if you are more dovish than expected, you are praised as a visionary, like Bernanke who some thought single handedly prevented another Great Depression.  LOL.  Remember when Greenspan was considered a maestro?  On the cover of Time and praised constantly as the dotcom bubble got bigger and bigger.  Remember when Bernanke was Time Man of the Year? 

With Powell's re-appointment coming up during the fall this year, he's painfully distorted his view of the economy, in order to nurture this bubble, to get to the finish line, re-appointed by Biden, before this bubble bursts.  He knows that if he does anything more hawkish than already very dovish expectations, the stock market will not like it, and down goes his odds of re-appointment.  

With all of that being said, I actually think its time to ride with the curve flattener for the next 9-12 months.  Not because I believe the Fed will hike rates sooner than the market expects, I see very little likelihood of that happening.  Its more about the way investors are positioned, and how Powell will likely change his tune once he gets reappointed.  Right now, the 5-30s curve steepener is still the popular trade on Wall St., even after the big move from the 140s down to the 110s in the past 2 weeks.  

I remember a mere 3 weeks ago, when, after another disappointing NFP report, all the talk was about positive carry in the 5s,  how much carry there was in being long 5s and short 30s.  I don't hear that anymore, but I still hear talk about how rate hikes are still at least 18 months away, Fed will stay dovish, blah blah blah.  Its not about the Fed staying dovish, everyone knows that.  The time to enter the curve flattener is when the Fed is dovish but transitioning to being less dovish.  Like the end of 2013.  Like the end of 2016.  Yes, there is a carry cost of about 2 bps/month for being in a 5-30s curve flattener, but expect that spread to be below 100 bps by the end of the year.  Right now, as I am writing, the spread is at 118 bps.

On bitcoin.  I usually don't even pay much attention to it most of the time, but over the past few weeks, among the non-bitcoin maximalists, there was quite a lot of pessimism, talk of $20K, if it breaks $30K, something really bad will happen, etc.  Well it broke $30K, and promptly made a panic bottom.  Things like bitcoin, which don't really have any kind of fundamentals, are an eye of the beholder asset.  Like art, or collectibles.   Its goes up and down based on the psychology of its participants.  And after that supposedly hawkish Fed meeting, and recent dollar strength, the negativity was about as much as I've ever seen.  The weak hands have mostly sold.  It appears that those holding bitcoin now, are mostly strong hands.  Looking at the chart, its looks like its basing between 30-40K before another uptrend to who knows what final bubble level it can get to.  Not sure about 100K, but a retest of the all time high looks better than a 50-50 chance.  But I would still rather ride the SPX than BTC. 

There isn't much to add about what's happening in the stock market.  Its a strong market climbing the Fed taper wall of worry, and probably explodes higher into a parabolic buying frenzy once the taper announcement is behind us.  I sold the small amount of SPX I bought on Monday and I'm back on the sidelines.  Still too much call buying for me to be comfortable buying at these levels and holding for a longer term play.  Obviously, not shorting this.  Not making things complicated, keeping it simple.  Waiting for the next dip to buy.