Time To Take A Stand
The Fed has an extremely rare opportunity at its hands. Will they capitalize on it? Will they even recognize it?
“I’m not going to sit on my ass as the events that affect me unfold to determine the course of my life. I'm going to take a stand. I'm going to defend it, right or wrong, I'm going to defend it.”
- Cameron Frye
My paid subscribers know we were pretty much spot on in predicting that the 9.1% CPI print from last month (1) marked the short term CPI peak and that (2) equity markets would rally in the short to mid-term as a result. I predicted it would happen in my July 2022 portfolio update:
I think it’s likely the 9.1% print is the peak, for a little while at least, based on current spot prices. Used cars are down, new cars are down, home prices are starting to come down as more inventory comes on the market, oil has sold off over the last 2 weeks, etc. This doesn’t mean inflation is over, not does it mean stocks won’t still move lower in the longer term once the effect of rate hikes put into place in 1H 2022 finally surface in credit markets, but it means we could be at a lull for the time being (1-2 quarters).
I think equities are going to rally on this sentiment (the fact that stocks didn’t crash spectacularly in the last 48 hours on that 9.1% print says something to me). The market is forward looking and the inflation numbers are backward looking, as much as I absolutely hate to admit it.
And while I’m happy to take a victory lap on that prediction (Disclaimer: I never predict anything correctly, so don’t get used to it), I want to now also lay out seperate game theory for the Fed going forward.
Not unlike Cameron at the very end of the movie Ferris Bueller’s Day off, when he finally decides to stand up to his father and show backbone for the first time in his life, the Fed has reached a similar opportunistic inflection point.
Given this week’s “good” (read: still absolutely dogshit 8.5% YOY) inflation print, markets have moved higher under the assumption that the Fed is going to use the data as an excuse to pivot. I think there’s an opportunity being presented to the Fed that’s profoundly different, and wanted to discuss it.