Pay F***ing Attention

Estimated read time: 2 minutes and 47 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: +0.58%

• Nasdaq: +6.42%

• Russell 2000: +0.29%

• US Dollar ($UUP): +2.0%

• Gold ($GLD): +2.48%

US Unemployment Rate +0.2% MoM to 3.6%

When unemployment is low, the Fed may take a variety of actions to ensure that inflation remains under control. One of the main concerns when unemployment is low is that it can lead to an increase in wages and prices, which can then lead to inflation.

We've seen very strong wage growth, i.e. inflation, over the past few years when compared to pre-Covid levels. The Fed has obviously taken action to raise interest rates over the past year which has contributed to the softening YoY growth, but the wages still remain elevated.

A strong employment report (which let's face it, this report was strong) will lead to the Fed continuing to raise interest rates to slow down economic activity and prevent wages and prices from rising too quickly.

For anyone keeping score at home, this current expectations for rate hikes is higher for longer. That's never something that investors want to hear...

Oh Jerome, what have you done!

Skills & Data Used This Week

For the purpose of this next section, please burn the below graph into your brain.

Over the past year, short term rates have risen more than longer term rates

So why do I give a s***? Here are 3 reasons why this environment is bad for the economy:

1. Reduced borrowing and lending

When short-term rates rise faster than long-term rates, it creates a flattening or inverted yield curve, which can discourage borrowing and lending. This is because banks and other financial institutions typically borrow at short-term rates and lend at long-term rates, earning a profit on the difference between the two. When the yield curve flattens or inverts, this profit margin decreases, and banks become less willing to lend money. Similarly, businesses and consumers become less willing to borrow money because the cost of borrowing rises, which can lead to reduced economic activity.

2. Negative impact on housing market

A flattening or inverted yield curve can also have a negative impact on the housing market. This is because mortgage rates are typically tied to long-term rates, and if short-term rates rise faster than long-term rates, it can lead to higher mortgage rates. This, in turn, can make it more difficult for people to buy homes, which can slow down the housing market and have a ripple effect throughout the economy.

3. Reduce consumer spending

When interest rates rise, it becomes more expensive for consumers to borrow money for big-ticket items like cars and homes. This can lead to a decrease in consumer spending, which can have a negative impact on the overall economy.

This chart doesn't exactly scream "accelerating consumer spending"

In The Account | my top holdings 

1. GOLD - $GLD

   1. Outperforming the S&P 500 this year...just sayin'

2. CASH

   1. While I still own a stake in $UUP, another outperformer of the S&P this year, I've been raising physical cash by covering shorts during this recent correct.

   2. Point is, I don't feel the need to re-allocate that money into something else right now. Not with volatility ,^VIX, rising (bad for stocks).

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

How about being short something like $XOP this past week and long $UUP and $GLD? That's called ALPHA.

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.