We got the bounce I was expecting so now what? More on that later. Jackson hole proved to be a non-event as Jay Powel didn't say anything all that surprising. In a nutshell, he said that the Fed is still prepared to raise rates if needed and that inflation although falling is still too high. I'm not going to get into discussing how much of a bonehead Jay Powel and Fed buddies are. I'm not going to discuss how the recent fall in inflation was largely self-correcting and had little to do with rising interest rates. Ok I lied. When it comes to inflation pretty much everyone just focuses on the impact rising rates has on the consumer,, namely the demand to borrow money and the ability to service debts. Rising rates means less demand to borrow money and more income required to service debts, therefore less money to spend and therefore less inflation...at least that's the narrative. But hardly anyone mentions the impact rising rates has on the supply of money. Banks are more inclined to lend when rates go up as they make more profit Rising rates also creates a fiscal impulse as higher interest payments are being issued on newly issued bonds and savings accounts. Higher rates also increases the cost of capital which can lead to higher prices being charged and raises the financing costs of expanding the supply of goods and services. These supply side impacts of rising rates are inherently INFLATIONARY. Even if you only focus on the naive, consumer only perspective, you have to take into account that the vast majority of consumers in the US have locked in low rates on their mortgages for several years which has blunted the squeeze of higher interest payments on existing debts, however, there is a squeeze on auto loans and other non-secured debts but these are smaller relatively speaking. The bottom line is that impact of rising rates on inflation is complicated as there are offsetting factors. If you look at anytime there was an inflation problem in any country it was mainly rooted in problems with the supply side of the equation. Demand for goods and services is generally steady and inelastic. We all need a consistent amount of food, shelter and energy, but the supply of these things are not always steady. Supply disruptions/shortages can happen for a number of reasons such as forces of nature (i.e. bad weather), political (such as embargos and nationalizations) and pandemics. Raising interest rates will do fuck all to stop the impact of a supply shock, if anything, it may exacerbate it as will be prohibitive to the financing of expanding supply which would be badly needed. We had a supply side shock in the form of a pandemic and now that the shock is normalizing inflation has come down with it, yet everyone is giving credit to the Fed for this. Bullishit. They might actually be hindering the disinflation. I was right when I wrote last year that the Fed is like Inspector Gadget. But I digress....
Back to the markets. NAAIM sentiment dropped to 34 on August 24th which was the lowest reading of the year.. That's quite a running for the hills for just a 5% pullback. It did bounce back to 61 last week but that 34 reading ticks the box for being at an extreme where solid, Intermediate term lows tend to be made. There have also been pretty notable equity fund outflows for the past 4 weeks totalling about $30 Billion and put/call ratios continue to be elevated and have been high enough to suggest an intermediate term low has been reached.. All in all, it didn't take much of a decline for people to run for the exists and that's the kind of behavior you want to see if you're banking on the recent decline being a healthy bull market correction. Hedge fund positioning has backed off but I would like to see it back off a bit more, so it's not an all clear just yet. Am I being too cute? I could be. It's a bit tricky now to call the ST. The easy money of the bounce has been made and of this bull run YTD as well. I can see the market going either way from here this month but if we go higher it probably would not lead to a new leg higher. I still believe the likely path of the market for the next 1-3 months is sideways with the possibility of a slightly lower low. As usual, my outlook will adjust as things unfold.
A couple of weeks back when NVIDA announced earnings after the close, I took a look at the messages being posted on the stocktwits message board. Despite the fact that the company reported blow-out numbers, the vast majority of the messages posted were bearish. It seems people were betting or hoping the stock would go down. Many people are calling NVIDA a bubble stock, yet you wouldn't see this kind of bearish posting back in the heyday of the tech bubble of the late 90s. You would have seen everyone cheering and pumping the stock. Back then bears were an endangered species whereas now they are a dime a dozen. I'm not on expert of NVDA and I know the stock is not cheap using conventional valuation metrics but what I do know is that there is a bearish undertone to this market which has been in place for the most part since 2009. If you've been reading this blog over the years (I'm not even sure if anyone actually does) you will know that I have used the term permabear trading community to describe a large portion, if not the majority, of traders out there. These folks became jaded and skeptics because of the crashes of 2000 and/or 2008 and I bet a good number of those who were posting bearish messages on NVIDA were tech bulls in 2000 lol. When most people first start trading/investing they are inherently bullish looking to buy stocks they believe will go up. Very few, if any, start their foray into the markets as bears always on the look out for what could go wrong rather than what could go right.
During the market recovery of 2020 we saw the rise of newly minted young traders who piled into speculative tech, crypto and meme stocks. Now after getting burned, they too have probably joined the ranks of the permabear trading community while some are still delusional. I have a friend of mine who is also an experienced advisor. He got balls deep into the meme stock fever. He, like all other holders of AMC was convinced that there was going to be a short squeeze of epic proportions and every time a rally would fall part he would blame it on manipulation by the powers that be and his negativity has coloured his outlook on the markets in general. Anytime he discussed AMC with me and the grand conspiracies surrounding it I didn't even bother trying to challenge him as there was no use. I would just nod along and wish him all the best. Now that AMC has been decimated these past few weeks I'm sure he's more bitter than ever. We've been planning to meet up for some time and so I guess I'll know soon.
