A Powell Pivot or More Energy

Fear.  What gets investors moving.  Its not about what I'm scared of, its about what the crowd is scared of.  If I am an investor in a stock, I'm worried about its long term earnings potential, total accumulated cash flow over the life of the company.  But that's not what the crowd is worried about.  Its worried about whether the stock will meet its earnings estimates, about what it will guide for the next quarter.  Its about whether recession will hurt its short term performance.  

You can't be self-centered in your thinking.  Unless you're brain is a replica of what the crowd is thinking (That brings on a whole different set of mental baggage that weighs on performance).  Through social media, you can observe in real-time, what a group of people are thinking.   If done well, observing the group and projecting their future behavior is an edge.  

Everyone seems to be scared of a recession, and the coming earnings reports showing weaker revenues and guidance.  I wouldn't say its priced in, but people are bracing for impact, which means you probably don't get that much selling during earnings season, but probably after its over, in late July, when investors breathe a sigh of relief and get complacent again.  

If I am investor in US stocks, my greatest fear is not recession, its 2 things: 1) the lack of money supply growth 2) the lack of supply growth in energy.  Both are flashing red.  

U.S. M2 Money Supply

Crude Oil & Condensates Production/Consumption

The money supply growth can easily be pushed higher by fiscal and monetary policy.  That's low hanging fruit for stocks, as more money in the system increases the price of everything.  But the energy supply.  Its not really growing.  Its stagnant, and even many of the energy bulls will put the blame for that on fiscal policy.  But is that really the case?  Are there a bunch of Ghawars awaiting to be drilled in "protected" locations that the Democrats won't give permits to? 

The public is way too optimistic about future energy supply growth, as if the past 50 years can be replicated over the next 50 years.  All the best locations have already been drilled.  Even the next best locations.  Now we are in the hard to get, expensive, high hanging fruit portion of the exploration cycle where lots of capex AND time is required to just maintain production levels, much less increase production.  The thing about the mediocre drilling locations is that it takes more money to produce, and you get much less production.  Its like real estate.  Location, location, location.  And there just aren't that many good locations left.  

So if energy supply growth isn't going to save this market, then it has to be money supply growth.  That happens with fiscal and monetary stimulus.  But Powell just turned hawkish a couple months ago, so he would look like a jackass if he went right towards a dovish pivot with inflation high, even if its decreasing from the peak.  He can't look like a jackass.  Its not about looking forward, its about his credibility, and even his legacy.  If he let's the inflation persist and tries to be balanced and worried about recession at the same time, he's going to look weak.  He's already viewed as a caver, and that's why so many are expecting a dovish pivot soon as the economic data comes in soft.  That's what the bond market is pricing in, as the Eurodollars curve is steeply inverted for 2023, pricing in multiple rate cuts.  They expect the economy to get bad, and they expect Powell to cave in to the markets and cut right after he hikes.  

Even though I agree with the majority that Powell will eventually cave in and give the market what it wants:  easy money, he's going to do it later than most of the fast money expects.  He has a tendency to always sound a bit dovish in his words, and that's going to work against him, because it will get investors' hopes up that he's about to pivot, even when he isn't planning on it.  I can picture a scenario in the autumn when he talks in his usual mealy mouth way, and the market misinterprets what he means and runs with the dovish pivot story, even before he's ready.  Its going to be a mess in the 2nd half, as the Fed is the only ones that can rescue this market.  Fiscal policy is toothless for the next 2 1/2 years, unless there is a full blown crisis that makes Republicans willing to help Biden with stimulus.  So basically, monetary policy will be the only game in town until late 2024.  

Without fiscal policy, monetary policy has to be super loose to get this market goosed higher.  At current valuations, you are not going to get a sustained rally unless you have both easy monetary and fiscal policy.  And since that's not happening, valuations have to come down, and is the reason the market is trading so heavy.  

This market has no lift.  Its got lead ankle weights.  It doesn't have that bullish energy that you are used to seeing from past bottoms (2009 to 2021).  The bulls have about a 2 week window during this intermediate term oversold period to make up some ground.  If they blow it, they are just setting up the market for even more serious damage in the coming months with no buffer.  No man's land now, but shorts will be a high probability play if there is a bounce in July.  There are many overweight equity longs looking to sell a bear market rally, so don't expect the bounce to last for long.