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- POWELL, RATE IN THE KISSER (Part 2)
Estimated read time: 3 minutes and 43 seconds
In this week’s newsletter:
Market recap
Skills & data used this week
Top holdings: what I am buying & selling
Market Recap
YTD returns:
S&P 500: -20.89%
Nasdaq: -33.04%
Russell 2000: -20.00%
Top holding position US Dollar ($UUP): +16.5%
Let's recap a few things just so we are on the same page:
Inflation is still high
In order to combat inflation the Fed has to raise interest rates
So with that being said, what did the Fed do with interest rates when they met this Wednesday?
"Battling inflation that remains at four-decade highs, the Federal Reserve said Wednesday it hiked its key interest rate by another 0.75%" - NBC News
"Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher food and energy prices, and broader price pressures," the Fed said in its statement Wednesday. It added it is "strongly committed to returning inflation to its 2% objective." - NBC News
Ok so they hiked rates and also signaled they will continue to do that in order to fight inflation. Sweet, got it.
But what was even more interesting this week was the media brainwashing the idea that the Fed was going to 'pivot' in their policy.
Pivot = change course of action, i.e. ease rate hikes or signal less future hikes (bullish)
If the Fed raised rates and signaled they will continue to do that in order to lower inflation to the 2% target (btw we're at like 8% today), would we call that a pivot?
Here's a collage of some of my favorite tweets I stumbled across earlier this week:
Want to see another collage? About how markets reacted after the 2pm Wednesday Fed meeting where they didn't pivot?
"The efficient-market hypothesis is a hypothesis in financial economics that states that asset prices reflect all available information. A direct implication is that it is impossible to "beat the market" consistently on a risk-adjusted basis since market prices should only react to new information"
Pretty fucking efficient on that "pivot" news, ya?
If the Fed was actually going to pivot, stocks would rally? But they...but...but....
Remember how we started off today:
Inflation is still high
In order to combat inflation the Fed has to raise interest rates
Skills & Data Used This Week
Hawkish or Dovish
Those two words get tossed around frequently when talking about the Fed's behavior.
So what do they mean and how should an investor prepare and react if they know how the Fed is behaving?
Hawkish = aggressive in nature with respect to policy. A hawkish Fed will raise interest rates in order to combat inflation, even it it comes at the expense of economic growth
Dovish = conservative in nature with respect to policy. A dovish Fed does not favor increases rates, and in fact would aim to cut them to stimulate economic growth
Obvious question alert - why wouldn't we always be dovish in order to constantly promote economic growth?
While lowering interest rates to promote economic activity will work in due time, eventually an economy can 'heat up' with respect to demand and cause price imbalances (that's called inflation in case that wasn't already obvious).
And if the Fed ignores it for too long we can start to see bubbles form - yes, what we just went through from 2020-2021 was a bubble - yes, it popped as the Fed's timing was too late in suppressing inflation and they started tightening (raising rates) as the rate of economic growth started to decelerate (you're not supposed to do that, Jerome)
So you can start to see there really isn't a right or wrong behavior by the Fed (not a political take, please don't cancel).
It's more so the timing and effectiveness of their policy behavior that's more critical.
The Fed has raised interest rates multiple times this year:
Timing = late, but necessary; inflation is very high and this will help lower it. Nice job, Jerome?
Effectiveness = bad, inflation is STILL very high
"We have got to get inflation behind us. I wish there was a painless way to do that. There isn't." - Jerome Powell, Fed Chairmen (September 21, 2022)
Jerome "The Hawk" Powell shall return...
In The Account | my top holdings
$UUP - US DOLLAR
Wednesday, October 26th. That's when you should have went to your max position in this. And when the Dollar rallied on BS "pivot" news, you sold some. And then you got another buying opportunity this past Friday. See what’s we’re doing here?
On The Radar | positions I want to build / sizing up
NONE
Yes, VIX has backed off from the 30s. That's a positive sign for investing back in (select) equities. But will it hold? Patience is virtue, no FOMO here.
Off The Grid | removed positions / short selling opportunities
TECH - $XLK, $QQQ
FINANCIALS - $XLF, $KRE
BASIC MATERIALS - $XLB
INDUSTRIALS - $XLI
RETAIL - $XRT
HIGH BETA - $SPHB
CRYPTO - $BITO, $MSTR
HIGH YIELD - $HYG
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.