The Fed just announced the 50 basis point hike this week. Albert and Sam explain what this means for markets in the near term. Also, how badly does JPow need media training (he said “a normal economic person probably doesn’t have that much extra to spend”)?
We also discussed what’s happening with TLT? And then, what will the Fed do next? Why is everyone talking about a 75bp move?
Tracy explains what’s happening in natural gas and the crude oil markets. Why does energy seem range-bound?
Key themes:
- What the F just happened? (F for Fed)
- What the F is next? (F for Fed)
- Why does energy seem range-bound?
This is the 17th episode of The Week Ahead in collaboration with Complete Intelligence and Intelligence Quarterly, where experts talk about the week that just happened and what will most likely happen in the coming week.
Follow The Week Ahead experts on Twitter:
Tony: https://twitter.com/TonyNashNerd
Sam: https://twitter.com/SamuelRines
Tracy: https://twitter.com/chigrl
Albert: https://twitter.com/amlivemon
Listen to the podcast on Spotify:
Transcript
TN: Hi. Welcome to The Week Ahead. I’m Tony Nash. Today we’re joined by Tracy Shuchart, Sam Rines and Albert Marco. We’re always joined by those guys. Before we get started, I’d like to ask you to like and subscribe. Really appreciate it if you subscribe to our YouTube channel.
It’s been a very interesting week, guys. We have a few key themes. First of all, what the F just happened F is for Fed. Then we’re looking at what the F is next. So that F also is for Fed. And then we really want to look at some energy stuff. Why does energy seem to be range bound? And I think that’ll be a really interesting discussion.
So Sam and Albert, kind of talk us through what the F just happened? We said this would be the most dovish 50 basis point move in the history of the Fed and it was. And here we are at the end of the week and things don’t look so good. So what happened?
AM: Well, was it a Dovish Fed? Not really. I mean it was pretty hawkish but it was already priced in. Everyone knows it was going to be 50 basis points and everyone knows they were going to talk about all these hawkish words. But then Powell comes out and throws in a little sprinkle of dovishness in there and then the market took off with it. I think it rallied at 3%? Crazy.
However, from what my guys told me, a lot of that was because traders were loading up on spy calls and ES futures and just gamma squeezed it. It was really easy. The market is kind of liquid right now. That actually agitated the Fed because they didn’t want this thing to rally and they came back and just torched everybody the next day. It was like 4% down? Just stunning. Absolutely stunning price action that we’re seeing right now.
It’s just not tradable. I mean you’re in this market and you’re swinging 100 points up and down each way every couple of hours. It’s just not tradable right now.
TS: Albert made a very good point. The thing is these swings that we’re seeing in energy and also in equities, these swings are untradable. Right. So that is very cognizant point that you have brought up.
SR: I mean the interesting thing to me with the whole thing was how quickly you went up, how quickly you went down to follow it up. Not just in ES and S&P, but the dollar got trounced following the Fed and finished flat basically to pre-Fed to finish up the week. You had the two-year absolutely plummet and make a little bit of a comeback. But it generally actually stayed lower following the Fed minutes. But these were huge moves across the board.
It didn’t matter what asset class you were trying to hide in, besides maybe energy. It didn’t matter where you were hiding it. You were just getting whipped. And there was very little tradability across the board in that period.
So it was pretty interesting also to hear several Fed speakers today. I think there were five or six of them come out and were generally hawkish across the board. I mean, you had one non-voter, Barkin, talking about putting 75 back on the table. I mean, it’s ridiculous. Powell just absolutely said no to 75. And then you have beneficials coming back with maybe I haven’t taken 75 off the table. I mean, not that Barkin matters, but he tried to put it back on the table. Their communications are a mess.
TN: The interesting part for me about Wednesday was Yellen came out first saying, “no, it’s all good. Nothing to see here. There’s going to be no recession. Fed is going to be able to manage it.” Everything else. To me, that was the real tell, right, that he was going to be fairly gentle. Of course, it was a 50 basis point hike, but it was a fairly gentle 50 basis point hike. And he was going to stave off the 75 basis point talk.
But then today we see these guys come out being fairly hawkish. So we’ll get into kind of what’s next in a couple of minutes. But I want to ask about a couple of things. Powell, he talks, man. He is not the Greenspan kind of mysterious guy. And his talking seems to get him in trouble.
So one of the things that he said on Wednesday that really caught me, which he said, I’m looking at my notes, he said “a normal economic person probably doesn’t have that much to spend” when he was talking about inflation, that much extra to spend. Sorry, but he actually let the words “normal economic person” pass his lips. And words like that, language like that makes American people feel like it’s the government, this gilded government employee who inflation doesn’t touch versus the American people. What’s wrong with those guys? Why are they using that language?
AM: In my opinion, they want to crush excess money and they’re doing just that. These wild swings in a week that’s meant to just erase money from the system. And Powell is an attorney. He’s not really an economic guy.
TN: An attorney should know words.
AM: Yeah, well, he doesn’t. He’s flustered. He’s flustered. There’s so much stuff going on behind the scenes that he’s flustered. And really, I don’t really even think that Jerome Powell is even in control of things. I think more align on to Auntie Yellen. I think she’s the mastermind behind this dollar rise. I know she is, in fact. I had discussions about it.
She’s the mastermind of pushing this thing past 110. She’s the mastermind of getting capital to force it back into the US equities. She’s the one doing all this.
TN: Right.
AM: Powell might be fighting it, but I’ve talked about this many times. You have this disjointed policy between what the Fed wants to do and Powell and what Yellen is doing. So this is what I see is going on.
TN: Sam?
SR: And to your point. I think their communications generally are a nightmare. They’re not doing a phenomenal job of telling people anything. Right.
It was such a disastrous week. You had quarrels out early in the week talking about how because Biden hadn’t nominated Powell to come back to the Fed. That was one of the reasons why they were behind the curve. Sorry, Randy, but that’s a ridiculous statement. Everybody knew, the betting odds never really broke through 70 that Powell was going to be renominated. Let’s be honest. He was always going to be renominated.
AM: You bring up an interesting point, Sam, and kind of a signal is will Powell actually get confirmed and is Randy and those guys, because Randy deserve this, I believe.
SR: Yes.
AM: So are they trying to defend or trying to upstage Biden and possibly not getting Powell confirmed?
SR: Well, it’s interesting because you would think that Corals would want Powell confirmed because Powell he’s fairly conservative in mindset relative to some of the other people. That could be dominated.
TS: Middle ground, too, I would say.
SR: Yeah, a decent middle ground. And most likely after that, it’s going to be Brainard. Right. I don’t think Corals wants to mastermind getting Brainard in there.
AM: No, I’m saying that Corals are trying to get ahead of the game here, thinking that Powell might be ousted.
SR: Oh, yeah, maybe. I also think that there’s an awful lot of people once they get out of the Fed and they see that they’re part of the decision making that got us to the current inflationary environment and current problems. There’s a little bit of face save when it comes to, hey, look, we wouldn’t actually be here if they had done their job. It wasn’t really us. It was this lack of nomination.
So generally, then you get into the FOMC meeting, the after presser, call it the kerfuffles that he makes constantly during it. Then you get to the Fed speakers after it. The worst part about the FOMC meeting is not the FOMC meeting. It’s just the blackout ends. Let’s be honest. Then we have to listen to them for another three weeks before the blackout comes.
TN: Normal economic people do stuff.
SR: Yeah. Like buy stuff and actually contribute to the economy instead of just blustering about 75 basis points.
TN: Right? Exactly. Okay. Before you get 75 basis points, Sam, can you walk us through what’s happening in the TLT market because it’s falling off a cliff a month ago. Is it like 140. Now, it’s like 118. So what’s happening there? Because I’m hearing a lot of chatter about that.
SR: Yeah. I mean, it’s the tracker for the 20-plus year US Treasury note. When yields rise, the thing is going to get trounced. Right? I mean, that’s pretty easy.
The easiest way to underperform the S&P this year has been to buy TLT. That’s just been that bad. I think it’s down 21% or 22% as of the close today. That’s a pretty devastating bond move right, for portfolios when bonds were supposed to be the safe asset. But generally it’s liquid. Right? You can buy and sell TLT all day long and you can short it. You can do some stuff.
So it’s a fairly easy way for particularly investment advisors and other smaller players that are running separately managed accounts to get in and out of fixed income exposure quickly and be able to move their portfolio duration pretty dramatically, pretty quickly. So it’s a trading tool.
And so when you need liquidity and you’re not going to sell individual bonds, that’s going to be generally fairly liquid and you get some pretty big spreads there. You’re not going to sell those bonds, you’re going to sell TLT instead.
TN: So are TLT markets telling us that they expect tightening to accelerate? Is that what’s being communicated to us?
SR: No, I would actually take the other side of that. And I think it kind of goes to Albert’s point last week is long end yields don’t rise if the markets are expecting a tighter, faster Fed. Right. That would be a recipe for disaster.
Recession being pulled in towards us, not pushed out. So the Fed is expected to do 50 basis point hikes instead of potentially 75. QT was a little bit, QT was basically what was thought even a little slower to phase in. Yields could be telling us a number of things, but one of them is not that the Fed is tightening faster.
TN: Okay.
AM: This is the problem. This is the problem. Right. This is something that nobody’s really talking about is the Fed is trying to create this narrative with long bond and whatnot that? We’re going to tighten. We’re going to tighten, we’re going to tighten. However, the market is still red hot. I mean, even the consumer credit today was outrageous. Did you see that?
SR: That was insane.
AM: I was talking to my client today and we’re looking at shorting retail and whatnot? And I said we cannot show retail. And he was why? I just walked into Gucci and it was a velvet rope with a line of 100 people trying to get in there. And none of them make more than $50,000 a year. Just buying stuff left and right. It’s like, well, the Fed is trying to say we’re tightening, but the market is red hot right now.
TN: Fascinating.
SR: I have no push back to that whatsoever. The consumer numbers today were stupid. 50 plus billion. That was a silly number. That was a silly, silly number.
TN: That’s a great segue to what the F is next. Right. What’s the Fed going to do next? Because if consumer credit is still expanding it’s really fast, how do they slow it down? Is 75 basis points are realistic? I know he said no. But then why do we keep hearing about it? Then why are all these geniuses saying 75?
SR: I haven’t seen a single genius.
TS: That doesn’t mean that it’s necessarily going to come to fruition.
TN: Okay.
SR: Yeah, I mean it’s, James Bullard basically planting that seed. Yeah, one fed and then Barkin picked up on it and said I wouldn’t rule it out. I mean, it’s two people that if you still listen to Bullard and Barkin, I’m sorry, but you’re going to lose money.
TN: Bullard was great like ten years ago, right?
AM: Yeah, but they’re trying to sway less than intelligent traders to believe that it’s coming. Maybe sway some money that way.
TN: The only reason I’m saying it is because I want everyone watching to know that.
AM: They are lying to you. Okay? They are lying.
TN: So the expectation is that what the F is next is kind of staying disciplined. 50 basis points in the next meeting and maybe QT accelerates slightly. Is that kind of what we expect to happen next?
SR: Yeah, I would say 50 bps, but I don’t think you even have to accelerate QT. It’s very difficult to accelerate.
TS: This mark is going to scare them. And what is going to happen is they’re going to be another 50 for sure. But they’re going to be even more dovish than they were last time.
TN: Okay.
AM: I actually want to take a train. I think they’re going to do 50 bips for sure, without question. But I think they’re going to have to accelerate tightening just to scare the market a little bit, for God’s sake, because especially if they want to…
TS: Acceleration timeline, I mean, you could barely take a magnifying glass to it. Right. So you’re talking about almost $9 trillion going down to maybe 8.5. I mean, can you really see that?
AM: No, but they’re also going to be using the dollar. They might even take a dollar to 115 or 120. It breaks everything.
TS: Any QT that they have, it has the exact opposite effect. So they’re not stupid. They know that monetary policy that they’re doing right now may break the market, but they’re going to ensure that…
AM: Yeah, but they want to do QE later in the year.
TS: They want to be able to do it.
TN: I saw an interesting discussion on social media this week about what’s the worst central bank to be a part of right now. And I think it was easily the Hong Kong Monetary authority. Right.
With everything terrible happening in China, but they have to match what the US is doing. It’s just a very difficult place to be in. So I think even as we talk about what is the Fed going to do next, there are some central banks out there that are just in a terrible place. And raising the dollar at 110, 115, 120 would absolutely break some of these central banks and put in a very terrible position.
AM: Yeah, but Tony, the Chinese, they’re very pragmatic with that respect. They’re waiting to see what the Fed does and they’ll react. They are for sure going to stimulate their economy.
TS: They’ve already announced so much stimulus. It’s ridiculous. The market hasn’t particularly reacted at this point as far as the commodities sector is concerned. But literally they have so much if you look at what they have said, they have so much stimulus on the line as far as infrastructure. They do not want, they want, they’re determined to have their 5.5% GDP by the end of year ’22. Right.
TN: Yeah. Well, they’ll hit that no matter.
TS: What they are doing is they’ve already announced so much stimulus. Markets not looking at right now. Right. Or the North American market shows looking at it right now, I promise you.
AM: Yeah, but Tracy, also, you got to remember that the SEC started coming out with delisting threats all over the place. They added 80 more companies to the delisting threat. That’s actually toned down.
TS: I’m not saying I would invest in Chinese companies. What I’m saying is I would invest in commodities.
AM: I know. But when you say that the market hasn’t reacted, that’s a lot to do with it. These delisting things have really scared investors away from them.
TN: What China needs is dump truck and helicopter loads of cash on the boon like tomorrow. And I think to hit 5.5, they’re going to have to do that in every major town. They’re going to have to unleash dump truckloads of cash. The infrastructure they’ve announced is close to what they need to hit that. Sorry? And they have a share… t
TS: hey’re made up number. But in order to. Yes. Hit that, you’re completely correct.
TN: Yeah. They’ve got to do it and they’ll end up canceling unofficially. They’ll give dead jubilees, all that kind of stuff. Like they’ll do all of this unofficially. But it’s to let people reload so they can spend more money. They’ll do all of this stuff starting as soon as they rip the Band Aid off of the lockdown.
TS: That’s why we’re seeing a deval in the currency right now.
TN: Right, right. Which we talked about for months and months. And I’m so glad that it happened. Let’s move to energy, guys. And Tracy, we were talking about this a little bit earlier about energy being kind of range bound.
I’ve got Nat Gas and WTI on screen. We’ve seen Nat Gas really come down hard over the past couple of days. Can you tell us what’s going on there? Because it’s performed really well over the past month, except for that little period. So what’s going on with Nat Gas and what’s going on with WTI? Is it really range-bound?
TS: I mean, it is range bound. What we’re seeing is we’re saying although it’s a larger range, right, like we’re seeing $10-15 ranges in WTI. What we are seeing is that if you look at a daily or weekly chart, you’re seeing that range is coming down. Right.
TN: Okay.
TS: And that’s to be expected. One thing that the market did was that they increased margins. Thank you.
TN: Yeah.
TS: They increased margins. That put a lot of retail traders out of the market. That said, if we look at the recent OI? OI has actually increased daily all this week. So it looks like and we can’t tell at this point whether it’s retail traders or institutional traders. But OI has increased this week in that sector across gasoline.
AM: Yes. Speaking of gasoline, I’m looking at diesel and gasoline crack. I think you’re looking at shortages coming in the summertime. Those things look to get explosive.
TS: You know, texted you two months ago and said, get long diesel.
AM: Yeah.
TS: It lies in the EU. Right. And they are going to see shortages. This is going to affect their overall GDP. We’re going to see less transportation we’re going to see less manufacturing. We’re going to see because they can’t handle these prices. That said, if you’re an investor, you’re going to look at the refiners right now that are refining these because the crack spreads are increasing exponentially.
So if you want to invest in this sector, I think you would be looking at refiners right now that specifically are involved in distillates. Interesting.
TN: Great. Perfect. All right, great. So, guys, what are we looking at for the week ahead? What’s on your mind, Albert? Definitely not shorting retail.
AM: Definitely not shorting retail. I just can’t take that out for at least June. But honestly, the Roe versus weighed the political atmosphere right now and how that’s going to affect the congressional races, not so much the House, because the House is set for the GOP, but possibly the Senate. And why I bring that up is because now those economic bills going through Congress, they start getting affected. And investors started calling me to try to figure out what’s the makeup of Congress.
And I think that’s what I’m going to actually start paying attention to because the beginning of next year we’re going to need stimulus the way that this economy is going. So I’m taking a look at what the makeup of the committees are going to be, what possible stimulus packages will be materializing.
The auto sector, for God’s sake, it’s completely trashed. I think that’s on life support and definitely going to need some help. I’m actually looking for auto sector plays for the long term, 24 months out.
TN: Okay, Sam, what’s on your mind?
SR: I’ll be paying pretty close attention to where the dollar heads, particularly based on our earlier conversation on the Renminbi. And in the end, following the Fed this week and then listening to how other central banks begin to form a narrative around their next moves based on the Fed in particular, Latin America is going to be very interesting given some of the inflation pressures down there and the push and pull of someplace like Brazil, where commodities are both good and bad for an economy, or Argentina, good and bad for an economy, export a lot of food, but import a lot of energy, even though you have the black maritime, psychotic, that’s pretty poorly run.
Anyway, that to me is going to be one of the really interesting stories of the next couple of weeks, given the Fed. The Fed moving quickly, beginning to do some quantitative tightening.
Generally, that would be your number one method of affecting markets is through the dollar. So I just want to see what the dollar does and follow the dollar and not fight that tape.
TN: Yeah, very good. Tracy, what’s on your mind for next week?
TS: I’m going to be concentrating actually on the yuan at this strength. I want to see how much are they going to actually devalue their currency, because I think that’s the sign of how desperate they are to bolster the domestic economy. That’s where my main focus is right.
TN: Supposed Fed your eyes on China.
TS: But you have to realize what happens is that people don’t really talk about why does China devalue the currency? They devalue the currency so that exports become cheaper and more competitive. In turn, that makes imports more expensive. Why does that help the domestic economy? That means that people in China are not buying imports. They’d rather buy from domestic businesses which bolsters their economy.
So right now I think that’s one of the most important things to be looking at right now is to see how much are they going like, how desperate are they?
TN: That’s a great observation and something that I watch every day and I’ll tell you, they’re very desperate. I don’t mean to laugh at it. I feel really empathetic for the people in China but they’re very desperate. So I would watch for some moves that are I would say that tried to appear disciplined because they don’t want to look desperate. But in fact, they’re desperate to get their economy moving because of these lockdowns.
So I think the first sign of that would have to be starting to see a lifting of the lockdown like a legitimate lifting of the lockdowns and not moving into more towns like they did in Beijing over the past couple of weeks. But really legitimately taking these lockdowns off and free movement.
Looking at things like the port zone in Shanghai and how many people are allowed to work in those bonded warehouses, those sorts of things to get that port activity moving. As we look at those indicators, we’ll know how serious the Chinese government is about getting back to work. If they don’t do it, they’re not serious. And if they’re not serious, they’re going to have some real trouble.
I’m not a gloom and doom kind of China is going to have a coup or anything type of guy. But I do think that they’re going to have some real trouble. They want everyone to be happy and harmonious going into the national party meeting in November and there’s going to be some runway needed to get everybody happy. And by everybody being happy, I mean all of those CCP guys in Guangzhou and all the different provinces, they have to be happy coming into that Congress because if they’re not, then Xi Jinping has several problems. Serious problems.
Okay, guys? Hey, thanks very much. I really appreciate this. Have a great week ahead and have a great weekend. Thank you.
AM: Thanks, Tony.
SR: Thank you, Tony.