Fiscal >> Monetary

Biden is running things as hot as he can.  Powell is trying to cool things down without going overboard.  Its not a fair fight.  Expansive fiscal policy (lots of spending and tax cuts) is popular.  And potent.  Politicians don't even pretend to care about the deficit anymore.  They know that the masses don't care.  People just want to keep their jobs and receive government handouts from time to time.  The US is a socialist country now.  The government has a huge influence on the economy, much more than it has versus anytime since World War 2.  The massive budget deficits prove it.  Powell can't win a fight against Biden because he has to pay more and more interest on an ever growing pile of debt with each rate hike, interest that is stimulative to the economy!  So his main tool of raising rates to slow down the economy just doesn't work like it used to. 

Most of the macro "experts" are still looking for that long awaited recession.  That is the general consensus from all the macro pundits that treat their opinions as if they are fact.  Still.  You would think that after wrongly forecasting a recession for 2023, they would rethink their views and see where they went wrong, but most are just blaming the long and variable lags of monetary policy for their missed macro calls.  Its like the investor that buys a stock that continues to sink after he buys, saying that he was just early, not wrong. 

After thinking about my missed call for a sharp weakening of the economy in 2023, it really comes down to focusing too much on monetary policy and not enough on fiscal policy.  And not thinking about the lack of monetary policy transmission with the low fixed rate mortgages that most homeowners locked in with refis in 2020 and 2021.  Same goes for corporations that issued tons of low interest rate, long duration debt in 2020 and 2021.  That immunizes a big swath of borrowers from higher rates.  That is not the case in Europe, which is why Europe is already experiencing a noticeable economic slowdown, while the US is cruising along with minimal economic damage despite 525 bps of rate hikes.  

In fact, it can even be argued that the rate hikes have been marginally stimulative, considering that a huge chunk of the higher interest payments that people are receiving are coming straight from the US government and its massive debt load.  There is a huge difference between governments paying interest and private individuals and corporations paying interest.  When governments pay interest, they are just issuing more debt to pay the interest, which effectively makes it like a stimulus payment more than a debt payment.  While those paying variable short term rates on loans are feeling some pain, they are counterbalanced by a bigger group of borrowers that are paying low fixed interest rates on loans that were made when rates were much lower.  And its the fat interest on cash and short term bonds that are tipping the scales in favor of the interest rates actually not having much of a restrictive effect on the economy.  

Most of what I hear out there is about the lags of monetary policy, how the higher rates will slow down housing and hurt credit formation, and eventually lead to a much slower economy and a recession.  That is the base case for most macro pundits.  The calls for recession haven't been canceled, they've just been pushed back to 2024.  Long and variable lags of monetary policy is sounding like a cliche that used to be true in the past when variable rate borrowings and shorter term debt was the norm.  Now corporations are issuing more long term debt than they have in the past, and most mortgages are now fixed rate, with most refinanced at historically low rates.  Monetary policy just doesn't have the bite that it used to because the US economy is less sensitive to interest rates than in the past.  

And I haven't even mentioned fiscal policy.  Take a look at federal spending as a percentage of GDP (excluding interest payments on the debt):  

 It is above 25%, which is higher than after 2008, when the US was in a deep recession and tax receipts were way down + high unemployment leading to more welfare/jobless payments.  The amount of pork flowing through the system, even without the jumbo sized interest payments on the debt cannot be ignored.  It is the elephant in the room that people are not talking enough about.  It is the single biggest reason that the recession didn't come, despite the warnings from most economists. Looking forward, fiscal spending will continue to run at high levels due to entitlement spending (Medicare and Social Security) that will naturally increase due to the retirement of the baby boomers, as well as the reckless attitude towards spending in Washington, as deficits don't matter anymore.  The masses love stimulus and prefer an economy that is running hot vs one that is running cold.  Bidenomics = run everything on overdrive and hope the engine doesn't blowup/inflation doesn't get out of control before 2024.  

There have been some moves over the past 3 months that I've completely missed out on, and/or have been on the wrong side of.  The move higher in stocks in June and July.  The move higher in crude oil in August.  The move higher in yields in August.  The one move that I did get right was the move lower in stocks for August, and it wasn't quite the magnitude of a move that I was looking for.  Predicting macro is hard.  I should probably give up on it, but its so enticing to try to be a macro guru and sound smart, when it doesn't really add any value for my trades and investments.  Really the only edge that I have in trading the big markets is looking at positioning and what people are saying/expecting in the coming weeks/months.  Anticipating the anticipators.  

Been wrong again this week.  Thankfully it was low conviction so I had no money on the thought.  Was looking for a continued grind higher and instead we've got a meaningful pullback.  Still think there will be some buying going into triple witch opex next Friday, perhaps to SPX 4520-4530.  But not a high conviction idea so I've yet to put money behind it.  I may put on a small long position today just for fun as I think its better than 50-50 odds that it bounces up next week.  Also getting more constructive on bonds at these levels, but wouldn't go big here.  Playing small ball until I see better opportunities.  Limiting risk until I have more conviction.