Federal Open Moron Committee

Estimated read time: 3 minutes and 49 seconds

In this week’s newsletter:

1. Market recap

2. Skills & data used this week

3. Top holdings: what I am buying & selling

Market Recap

YTD returns:

• S&P 500: +3.4%

• Nasdaq: +8.87%

• Russell 2000: +7.02%

• US Dollar ($UUP): +2.41%

• Gold ($GLD): -0.75%

Last week was packed with important data releases so this week we only have the Fed meeting minutes to pick apart.

For those new here, there's a structured cadence to data releases and Fed policy actions:

1. CPI report is released during the 2nd week of every month

   1. This report outlines the rate of change for inflation and sets up the Fed's policy decision with respect to interest rates

2. The Fed meets ~1-2 weeks after the CPI report is released (but for only 8/12 months)

   1. The Fed meetings are 2-day events where on the second day big daddy Jerome Powell, Fed Chairman, hosts a press conference stating any Fed policy changes (interest rate hikes, cuts, pauses)

3. Three weeks after this meeting, so close to 1+ months since the CPI report is released, the Fed meeting minutes are released

   1. That's where we are this week - looking at a transcript of a meeting that took place 3 weeks ago for an inflation report that's 1+ months old!

Some key highlights from the Fed meeting minutes:

With inflation still well above the target rate (6% vs. 2%), it's reassuring to know that our beloved Fed wasn't considering a pause. In fact, some ballsy mother f****** wanted to go mega hawkish and raise rates! You go Glen Coco!

And in case you were curious, here's a CTRL+F on the word "inflation" over the previous Fed minutes.

Me thinks inflation is still a thing, yeah?

Reminder that the Fed Funds Future was pricing rates to peak about May-June of this year. That means we should not be surprised if the Fed continues to incrementally raise interest rates in their next 2 meetings (March 23rd & May 3rd). But what if Powell takes the advice from some of his colleagues and switches back to a 50 bps hike?

Or even worse, what if the Fed doesn't do what the Fed Funds Future is pricing in? Could you imagine what happens if he hikes beyond June of this year?

Hot off the press: this June hike is new

What's critical as we move forward in 2023 is understanding the RoC (rate of change) for growth and inflation.

Inflation will continue to fall and we should not be surprised by this. But clearly it's taking its sweet ass time, and I expect that to be the case for much of 2023.

As far as growth goes, we are coming off one of the largest growth bubbles (in RoC terms) of all time. It was near impossible for 2022 to surpass 2021 in that category and as a result we saw a blood-red year for stonks.

Growth is expected to continue slowing as we get past this "bubble" phase in 1H2023. But what about 2H? Early signals show growth will not trend lower and has the capability, again on a RoC basis, to accelerate.

The questions remains, when will the market price this in?

Once this is for certain: we wait and do not chase.

Skills & Data Used This Week

The inverted yield curve.

Typical yield curve inversion: when the short end of the curve (2 year interest rate) exceeds the long end of the curve (10 year interest rate).

Ok, so why is this bad?

Think about a bank that borrows on short term rates while lending out on long term rates. It costs more to borrow than what they are receiving back in interest!

It's no surprise that all inverted yield curves lead to a recession. That's because recessions mean slowing growth, and the long end of the curve (10 yr) will fall on signs on slowing growth.

It's doing so to help aid in lowering the cost to borrow, which helps companies grow. Get it?

The problem is, the Fed influences the short end of the curve to combat inflation. So when you have a 10 yr curve that reacts to economic activity, coupled with a reckless Fed that is hiking short end rates to combat historical levels of inflation, you get...an inverted yield curve.

Inverted yield curves are a leading indicator of recessions. 100% of the time.

In The Account | my top holdings

1. GOLD - $GLD

   1. I like gold in terms of $GLD terms, but because Gold Miners ($GDX) act more like a stonk rather than a currency, volatility can whip this thing around. I've cut back on Gold Miners for now, but physical gold in $GLD terms remains and long

2. CHINA

   1. Economic outlook for China remains in tact; signal, on the other hand, is being closely watch. Signal ALWAYS trumps the narrative.

   2. $EWH, $PDD, $KWEB, $LVS

On The Radar | positions I want to build / sizing up

1. NOTHING

Off The Grid | removed positions / short selling opportunities

1. TECH - $XLK, $QQQ, $GOOGL, $TSLA

2. RETAIL - $XRT

3. HIGH BETA - $SPHB

4. CRYPTO - $BITO, $MSTR

5. HIGH YIELD - $HYG

6. ENERGY - $XOP

Until next week....

-BW

DISCLAIMER: None of this is financial advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. Please be careful and do your own research.