Taking Head Out of Sand

The equity crowd finally seems to be getting it:  Dove Powell is not coming through that door to rescue the markets.  It only took relentless pounding from stock jockey Bullard who kept sending the message repeatedly.  Powell doesn't want to do the dirty work.  He has his underlings to do it for him.   He's a coward and unwilling to speak the truth, instead being as mealy mouth as possible so as not to "hurt" the stock market, while still trying to sound tough on inflation.  But he doesn't want to act tough on inflation, unless there is political pressure to do so.  And Biden and Congress is putting on that political pressure. 

Powell is no dummy.  As he was spewing the transitory BS, he probably knew there was a good chance that inflation was going to remain sticky, but he couldn't say that, because he didn't want to upset the stock market before his reappointment decision.  After horribly mismanaging 2021, he's now under the gun.  He doesn't want to hurt the stock market, which makes him look bad, but he also has to give the image of a banker who is actually worried about inflation.

Now freshly reappointed for 4 more years, he can be a bit tougher on the stock market, although if he could get away with it, like Kuroda at the BOJ, he would stay at zero forever.  But he can't.  Unlike Japan, the US money supply situation is much, much different (just look up Japan M2 vs US M2 over the last 20 years).  Plus, Powell's main priority is not maximizing unemployment and keeping inflation under control, its winning brownie points from the White House and Congress.  His urge to please his political bosses means he has to look like he's tough on inflation, when he's been anything but that throughout his tenure. 

Yesterday's CPI number isn't anything extraordinary, it was a bit higher than already high consensus estimates.  But for some irrational reason that I have a hard time understanding (short covering?), there was a big rally for 2 days ahead of the number.  So SPX was basically at the top of the range, 4590, right before the number came out.  It was set up for disappointment. 

Now you have a situation where the market has gotten a bit overboard, from being too complacent about Fed hiking, thinking Powell will be one and done, to being too worried about a 50 bps hike, and even an inter meeting hike, which isn't going to happen.  10 year yields are now over 2%, but more importantly, 5 year yields are at 1.95%, as the yield curve is getting very flat, very quickly.  7-10s is at zero.  5-30s is at 36 bps.  It has only been this flat in 2018, just as the Fed was finishing its rate hiking cycle, not starting it.  Much like the 2004 to 2006 rate hiking cycle, when Greenspan was late to start hiking, and very slow to get to the final Fed funds rate of 5.25%, the market was pricing in a bunch of hikes before Greenspan even did his first rate hike in June 2004.  The interest rate market is screaming to the Fed to hike aggressively, pricing in more and more hikes, despite the equity guys hoping for one and done.   you are late, and you will be hiking a lot, because you are late.  

Even with all these hot inflation prints, the Fed is still doing QE!  LOL.  And if Powell could have gotten away with it, he would have stayed with the turtle taper of $15B a month, not letting him hike until July!  If it wasn't clear during Greenspan and Bernanke's days, its obvious now:  Fed is always in a rush to ease, and always way too late to tighten.   

We have given back the last 2 days of rallying in 1 day.  At one point, the SPX was rallying aggressively after the open and had filled the gap, but it crapped the bed again on Bullard comments and more selloffs in the bond market.  With so much angst now about Fed rate hikes, and so much priced into the March meeting, I can't imagine anything but a weak SPX going into early/mid March.  If that's the case, we can see that retest of 4250-4300, which is my base case scenario.  The put/call ratio was surprisingly low yesterday, so it seems like short term investors are still believers in the V bounce.  

Usually don't want to short a bounce after such a big waterfall decline, but its looking more and more likely that we'll be seeing a lot of weakness over the next few weeks.  If we can revisit the 4560-4580 area on a bounce within the next 2 weeks, I will be looking to put on a short to ride down for a potential retest.  Just watching and waiting for the right spot, don't ever like shorting after a big selloff on/Fed talk.