Make no mistake about it: for the last few months, I have been writing that I am waiting for a real capitulation moment - a moment of real fear and panic selling - to indicate to me that a bottom may be near in the market.
Although timing a “bottom” here is difficult, but it isn’t just like we are riding out volatility from the war or a slowing economy - we are truly at the behest of the Fed and its attitude on interest rates. If the Fed decides it wants to raise rates to 5%, the bottom is going to be much lower than if they telegraph they are going to raise until 3% and then stop.
This is the guessing game the market is trying to play: identifying the very first moment that the Fed gives any sign that it is going to back off its plans in the slightest (easing). So far, Jerome Powell has done a great job communicating to the market that this point isn’t near.
But, as we all know, the Fed has no backbone and this can change at any time. I’ve already written about the idea that the Fed is likely going to have to pivot and how extremely bullish for gold this will be.
Additionally, I believe, as I told Phil Bak in a podcast last week, that there is still far more excess in crypto that needs to get carried out before we ever get to a bottom. This week I wrote about Mike Novogratz and why crypto “gurus” don’t have any more of a clue than the rest of us. There’s still tons of “assets” out there, however, that I believe are worth $0 that have massive market caps.
I also think there’s still room for many equities to move lower, as I argued with SNAP this week:
Another issue to be mindful of is the fact that the consensus now is shifting to the market moving lower. I usually try to be on the other side of the consensus, but I actually believe this to be important because it isn’t until we get everyone on one side that we can “tip the scales” toward panic and have the capitulation moment the market needs.
Despite this, it doesn’t mean I don’t see bargains in today’s market that I am actively buying. I highlighted some of these names in this piece last week. There are even some tech names, like Zoom (ZM), which I nibbled again this week in the $80’s, that have posted good numbers and generate cash that I think are worth keeping an eye on. What I don’t want to do, however is follow the Cathie Wood method of buying literally any cash-burning dogshit that isn’t nailed down to the floor anytime it dips. This is the definition of investing insanity and is the “active management” necessary to continue to propel ARKK lower, even if the market bounces, in my opinion. I wrote about this more here.
Trying to catch a bottom is a generally fruitless enterprise, though Bill Ackman’s tweet stream this past week about inflation did remind me of the “hell is coming” Covid bottom that the market experienced. I think in today’s market it’s all about knowing what the Fed is going to do and has little to do with technical levels of valuation. The Fed can put the screws to the market for as long as it damn well pleases and it shows no signs of wanting to let up at the moment.
For now, what I want to put to discussion for my readers are the following questions:
Is there still a Fed put? And if so, where do you think it is?
What signs are you looking for that equity markets have reached a bottom?
How white knuckled can Powell stay, holding the wheel, as the car races toward the brick wall at 100 mph? Now that he has a second term, is Powell going to be the guy that truly tries to sacrifice the economy to have his own “Volcker moment”?
Is inflation going to roll over at any point, or will it persist?
I’ll be discussing these topics in an upcoming podcast with a guest that I know most of you love, but I won’t reveal just yet. It should be out in time for the long weekend.
Please leave your answers below.
Buy great companies trading below book value that are generating tons of cash, paying a divided or buying back shares. Then turn off your computer and come back in 10 years. Don’t overthink it.
It's all about the oil. It is the lifeblood of all economies and rules inflation. It is currently at all time highs and climbing with no relief in sight. How can anyone say we are anywhere near at reducing inflation? Is inflation good for the economy?
I like how you look for real value in companies that are making cash.
Way Way too much focus soley on the Capital Markets here, the focus in terms of the Fed changing course will have to be when you see massive cut backs at corps, downsizings, layoffs, plant closings, home builders going broke, planning consultants going broke, engineering firms and architects going broke, go back and look at even the early to mid 90's this was a very challenging time for all facets of the Canadian & US economy, forget Volker days just look at the 90's and the debt levels for people and gov's today versus then is unbelievably higher. Likely sometime in the next 12-24 months the Fed will pause and the markets will be lower by 50% or more and at this point inflation will have been eradicated and deflation will be the concern.
The question is what is more important, the domestic economy or the reserve currency status of the dollar. I think for the Fed it is the reserve currency status of the dollar. So, inflation will need to be tamed and rates will need to go a lot higher. So, there is no Fed put. I would love this to be discussed on your pod cast.
I think Fed put is, SPY close to Pre-COVID highs - 3400. Everyone in my feed is expecting a bear market rally. I think we get bear market rally after or just before the CPI print on June 10th and then it should last for a month before rug pull happens into Oct/Nov. I am not yet sure how mid terms impact with my thesis, but that's what I think is going to happen.
We are not even close to a level where a new "Fed Put" might be seen. S&P 3200 looks like an area where this idea could gain momentum. Also thinking inflation will start waning as consumer behaviour dictates change.
Couple of points, then I'll tie them together
1/ The problem with the economy (which is where the Fed cares) is that we have global supply chains with JIT delivery that are going to take years to reoptimize post Covid. Production related inflation is going to be a problem for a while.
2/ With Trump's Corp Tax Reform, there is now an incentive to onshore production capacity - but this takes a lot of time as new builds are driven by incremental capacity needs vs. rip and replace movement of production capacity
3/ Heightened Geopolitical risk incents onshore production over global supply chains regardless of cost of capital. This gives the Fed a little more room to combat inflation
4/ There is a headwind against domestic energy production - removing a path back to lower prices as top line plummets, bringing core inflation with it eventually. The Fed won't get a structural tailwind from lower energy prices until at least 2025.
5/ Biden and Dems are a sinking ship - so the political incentive to place the Fed Put higher is less than it otherwise could be
6/ The Dollar is in danger of losing it's reserve status. I don't know him personally, but my guess is that Powell doesn't want to be driving the Fed when the Dollar resets and will do what it takes to keep this from happening
To tie it all together. The Fed has lost a lot of credibility since Greenspan and there is a widespread assumption that it will limit market losses to minimal drawdowns. Fed communications (a critical tool set) are more effective when the market believes they face a greater penalty for being wrong (i.e. the "risk" side of the investing equation is larger). I think the Fed has more freedom to monkey hammer inflation down in the short term without creating a longer term barrier to production. Thus, I'd conclude that the Fed Put is MUCH lower than people realize and we're only about 33% of the way down on this Bear Market.
Happy to add to this thread if anyone has any questions or comments.
This bubble has been so enormous, and the insanity so vast, that a serious shock is needed to end it. Somewhere below 2400 for the S&P 500 seems necessary. Whether the current wifty Fed has the guts to let that happen is the big question.
I'm not concerned about a market bottom. I'm just watching and buying stocks showing strength, which right now are energy stocks.
Thanks. You and Greg Mannarino are very much on the same page. But he's confident in some crypto being safe and profitable in the long haul, not all.
I have made money the last 12 months being in some oil trusts and big oil like XOM etc.
I like getting paid regularly for owning the shares.
I doubt Powell reaches a "Volcker moment." Higher interest rates are already crushing asset values. And as mentioned above, we likely have a ways to go. S&P 500 P/E ratio is still at a historic high, although it has corrected closer to the historical average. Meanwhile, Q2 GDP will likely be negative after the first half-point hike and bearing the brunt of the impact of the Ukraine-Russia War so far. Powell will only withstand the pressure for so long before he caves to his Wall Street buddies. I'm eyeing 1+ year of no/stagnant GDP growth. That's when we'll see the retail investors that have driven growth over the last two years start to dry up.
But even if a recession slows inflation, it will not stop it altogether. Not when every essential commodity is up double and triple digits over the last two years. And that ties back to energy prices, which will remain high until someone decides to ramp up production. It's a nightmare scenario.
The FED certainly seems to be in control of the market here. I watch the 2-year as a precursor to FED action. More often than not it front runs the FED. Currently the spread between the FED funds rate and the 2-year is wider than it has been. If the 2-year settles here and starts to move lower, I would be inclined to think the FED may be talking tough and be actions will be soft. Maybe one more 50 basis point hike in June and done. If the 2-year pauses and marches higher we may be in for a rough road. My thoughts.
1) IMO, we'll start to find out after 2d qtr earnings. 2)How the markets react to 2d qtr earnings will be an indicator of where we are in respect to market bottom. 3) Powell tells us how white knuckled he is willing to be back in 2012: “And I guess I would take issue with Vice Chairman Dudley’s comment that we can move them—I don’t want to characterize your comment. I would just say that it seems to me there would be real costs in being wrong about that. These are numbers that we put out there; we own them when we put them out there. To change them in any way in the near-term, I think, would be problematic and costly from our standpoint. “ J. Powell (FOMC 10/24/2012 Minutes) I think the inversion of inflation and unemployment in the current environment has the Fed Chairman much more spooked than we realize. He knows we aren't in Kashkari Kansas (2% inflation and 6.5% unemployment) anymore. 4) My working assumption is that the most likely probability is the rate of inflation stays the same or slightly slows...no rollover in the near 1-3 months.
With my usual caveat of ‘wtf do I know?’; Fed pivot further away than Wall Street wants but nearer than it needs to be to get inflation under control (cop out answer I know); Real bottom of equities simply depends on where the Fed is prepared to let it fall to. Had a big bank client (small part of national name in UK), the stock went from £6.00 to £0.50. The smell of involuntary farts in the C suite was a good sign that the bottom had been reached. Powells knuckles will not be the sign, the carpet burns on his knees will be. The only thing he wont sacrifice is his job, he will do whatever it takes to keep that. Inflation will go down, everyone will breath a sigh of relief, then it will go back up again. We are going to be gaslit by oscillating inflation which will confuse the fuck out of everyone.
All the above is in my imagination. (I get shit wrong a lot)^10
Inflation must continue because the banks require it. Who rules is is the central banks.
Full economic collapse. Death of the market as a whole and the zombie apocalypse.
Politics and Geo Politics can play spoilsport for any predictions. i think the put will come to save the democrats in November
The fact that these questions are the most pressing , tells us everything we need to know.
It’s the umpire’s game now, not the players on the field.
bottom nowhere in sight. Until Novogratz, Pomp, Saylor, Pal, Wood, and Gerber etc. quit spewing garbage then we may be close. Not that there aren't good companies to acquire atm. This massive "tightening" that has taken place has been an illusion as the Feds balance sheet has continued to grow.
Word on the street is they start selling bonds tomorrow. This is where things get interesting ladies and gentlemen. This could be where the "correction"becomes a little less orderly. Schadenfreude mode activated.
Oil. War. Harvests not planted nor sown. No fertilizer. Look for mayhem. Apple and others will be toast as PRC melts down into Covid madness, Sooner than you think.
Chris, I would love to see you interview Peter Zeihan! Please please please invite Peter.
I see the DXY coming down off its high of around 104 to about 101 which is a good indicator that people aren't scared shitless at the moment; but bond yields continue to fall as money clearly is heading into the bond market and as the very recent activity in the stock market shows, equities as well. Feels a bit like everyone's wondering if the coast is clear but investors are being cautious, which is a good thing. I think it's a good time to start nibbling.
I think Powell is in a tough spot because of D.C. politics. Sounds like the Fed didn’t start QT last year because of Powell’s renomination was this year and he did want his legacy to end w/ the crap storm that was started. So he continued w/ QE despite all the congressional stimulus & spending. 🤦 His hands will likely be forced to go more Volcker than not.
I’m looking at a few things before I nibble at adding. All 4 are related.
1)S&P 500 Forward P/E to reach 14x (Currently around 17x).
2) Current ‘trash’ stocks I own are SOFI, DKNG, RBLX, & PENN have been butchered . My DCA isn’t too bad on those and I bought them knowing the risk. I have enough solid companies & cash in my portfolio to offset those ‘companies’. I know that people will drink still alcohol (beer), bet on sports & play video games during recessions / hard times. I witnessed it in 1990, 2000, 2008, 2018, etc…
2) I suspect sellers are now focused on the Generals. Let’s see more Blue Chips get body slammed more. Although I personally vote TSLA as a general, it should 100% be trading less than $400.
3. Waiting to see more rate cuts and Fed balance sheet unloading. We do have 2 years of free booze to “throw up”.
4. Finally, need to see some sort of inflation & supply chain stabilization.
have been heavy energy and commodities, former pays dividends and people have to buy both; only wildcard is govt instituting price controls
We're about to hit a long term emergency where the productivity of economies is hammered by resource depletion, supply chain problems, demographic changes, civil disruption and energy shortages. That's going to mean loss of government revenue just as they have to deal with a huge cohort of aging citizens retiring. That will trigger big tax rises and collapse share prices as profitability simply vanishes.
The bottom will take 5-10 years to find as that all shakes out, and will be lower than people expect.
1. Is there still a Fed put? And if so, where do you think it is?
Yes there is, because in the end the FED is beholden to Wall Street and Congress. Not the little people. Not sure where the strike price of the put is though.
2. What signs are you looking for that equity markets have reached a bottom?
VIX skyrocketing, traders committing suicide by jumping from windows. Cathy Wood being banned from TV shows.
3. How white-knuckled can Powell stay, holding the wheel, as the car races toward the brick wall at 100 mph? Now that he has a second term, is Powell going to be the guy that truly tries to sacrifice the economy to have his own “Volcker moment”?
Had Volcker be around today, he would not have been able to do his thing. Instead, the woke mob would have protested in front of his home and demanded more free money for socialist programs until he caved.
4. Is inflation going to roll over at any point, or will it persist?
As long as Biden is president, inflation will persist. His dumb policies will guarantee that.
I suspect the Fed will reverse course (QT -> QE) before the mid-terms. They may talk tough, but they will resume QE. Powell cannot be like Volcker, because there is just too much debt interest now. We'll have the usual "kick the can down the road" and higher inflation will be the norm. To me, the main market risk is a lack of liquidity in the short-term from QT.
First: Plant a garden now.
The car is going to crash into the wall one way or the other...
Option 1) The Fed gives in, double fists at the corporate bond bar, and we get a slow motion dead cat bounce... and then Option 2)... or...
Option 2) Ag input price inflation causes a food crisis in the Fall and the resulting social unrest boxes the Fed into Volcker-style hiking into the current recession. (With inflation actually north of 12% per John Williams/Shadow Stats, we are already in a recession.)
At Option 2 - which is a sooner-or-later question - the tides goes out real quick and a lot of tech and small cap is seen to be swimming naked...
We will not see the bottom until we see who is swimming naked...
Strange, for some reason I no longer get QTR in my inbox on the Substack app. (I’m a paid subscriber)
The bottom: all assets- gold, bonds, stocks - flat at a low. No bounce.
AMC and GameStop far below pre COVID
I don’t think the Fed is the only consideration. We are going into a depression and any pivot might be too late and ineffective.
I think the bottom depends on category. Energy just seems to keep going up. Aerospace & defense seems like a good play right now as well, given the $40B bailout to Ukraine/defense contractors being proposed.
We need to have persistent high volume and sustained high volatility in the options market. When those two align we'll see the bottom.
What are the odds all of this ends in a currency crisis? The Fed has barely moved rates and markets are in free fall. Do people wake up this time and understand that the Fed can’t unwind anywhere close to fully? What is the realistic way out?
We need to see the Vix above 40 plus one very down day of at least 5%. So far it has been quite well drilled, almost military, the way we have descended. Its not impulsive enough. We need people running literally for the fire hatch, trampling the others in their haste and so real capitulation is needed. Even then, a false flag bull breakout of a few hundred points could be a nasty precursor to the real shift down. Yes, I think 3400, or even a bit lower, would be a reasonable bet.
Its all about sentiment. Cheers Oliver
Wall Street always wins hands down. Playing both sides against the middle is the name of the game . It makes money either way. Tough call to make.