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Month: September 2023

Fed Fears Show Signs of Peak

The following is an amended version of the Sept. 21 Daily Contrarian. This briefing and accompanying podcast are released to premium subscribers each market day morning by 0700. 

The Federal Reserve yesterday kept its key interest rate unchanged as expected but made enough noise about “higher for longer” to scare investors. Stocks and bonds sold off.

chart of 2-year yield on Sept. 21, 2023

In the case of 2-year bonds, yields spiked to a level not seen since 2006 (see chart on left).

So clearly the market was not prepared for this hawkish language from the Fed. Meanwhile, all Powell really did is just reiterate what the inflation data is telling us, which is that there is more work to do before monetary policy can be loosened. Yes, the dot-plots did move a bit, but that just tells us how FOMC members feel right now. New data can and will change their views.

The Opportunity

Whether they’re justified or not, there is a sense now that maybe Fed fears have reached a bit of a fevered pitch. Just look at the headline in today’s Wall Street Journal: “Higher Interest Rates Not Just for Longer, but Maybe Forever.”

WSJ headline: Higher Interest Rates Not Just for Longer, but Maybe Forever

Ignoring for a minute that “forever” is a pretty long time, this take conveniently forgets that we’re talking about the same Powell Fed that flooded the system with liquidity during Covid and then kept rates too low for too long. The Fed may have to keep raising rates now (thanks to its own doing), but there is no way in hell this continues “forever.”

This is the kind of language you look for to indicate a turning point. And if fears of Fed are indeed at a peak, then fear of fixed income — specifically short-term bonds — could be at a peak as well. And that could be a buying opportunity for bonds. At some point the economy will slow, inflation will ease, and the Fed will cut rates. Then investors will pour money into bonds as they abandon the riskiness of the equity market. We aren’t there yet. But we’re a day closer.

The only way the Fed doesn’t eventually pivot is if we get stagflation. And even then: That will just force the Fed to choose between protecting purchasing power (price stability) and sending the global economy flying off a cliff or flooding the market with liquidity again to spur economic growth. If you’ve been paying attention to the Fed these last 30 years it will be pretty obvious what path it chooses — especially if it’s faced with this conundrum during an election year.

Here’s short audio where the host gets into this a little bit:

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Contrarian Investing Primer With Phil Pecsok, Anacapa Advisors (Szn 5, Epsd 24)

Phil Pecsok, founder of Anacapa Advisors, joins the podcast to supply a primer on contrarian investing: What it is, what catalysts to look for, and some valuable lessons from his 30-year career on Wall Street.

Content Highlights

  • The guest provides his views of contrarian investing and how he uses it (1:27);
  • Examples of blaring contrarian signals from past cycles (9:00);
  • The Fed is likely to stay hawkish (13:14);
  • The ‘Rule of 3’ in contrarian investing as illustrated in a story from early in the guest’s career (16:37);
  • His views on cryptos (24:13);
  • Background on the guest (30:01);
  • Sports betting is an efficient way to lose money, unless you’re running the book. But sometimes there are sometimes contrarian opportunities (37:46);
  • What keeps the guest up at night? Nothing in particular, though stocks are probably overbought even after the recent sell-off (45:17).

For more on the guest and his firm, visit the website AnacapaAdvisors.com.

Quick Video Highlights

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Hard Landing for the US Economy, Mild Recession to Spare Emerging Markets (Szn 5, Epsd 23)

With Ayesha Tariq, MacroVisor

This podcast episode was recorded on Aug. 29 with a ‘highlight’ clip of the most actionable insights released to premium subscribers that same day. Premium subscribers then received the full episode — without ads or interruptions — the following day, on Aug. 30.

Ayesha Tariq, co-founder of MacroVisor, rejoins the podcast to discuss why she is expecting a hard landing for the US economy along with other contrarian views she has about the Federal Reserve and global financial markets.

Content Highlights

  • The ‘soft landing’ scenario has effectively become the base case. Why that’s wrong (1:32);
  • Unlike many (most?) recessions, this one will not be preceded by a Fed-induced credit event. For this reason, it will be milder (4:44);
  • The Federal Reserve is likely to hike at its next meeting on Sept. 20. That will be its last hike this cycle (8:53);
  • The US downturn will not necessarily lead to a global recession (12:58);
  • The outlook for commodities, specifically copper, is bullish despite the bearish economic outlook (18:48);
  • Rate hikes might be off the table, but quantitative tightening could still be incoming in 2024 (23:45);
  • New segment: Listener questions. Whoever’s questions are read wins a free Contrarian mug. First up: what to make of Nvidia and AI (26:36);
  • Next listener question: what to look for in bank earnings? (31:42);
  • One area of the stock market where the guest is particularly bullish (36:35).

For more about the guest, visit her website MacroVisor.com or follow her on Twitter/X.

Not investment advice.

Quick Video Highlights From Our YouTube Channel

Transcript

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