Powell Catches A Bluff In Heads Up Hold 'Em Versus Bond Market

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Fear and euphoria are ascendant forces, and fearfulness is galore multiples nan size of euphoria. Bubbles spell up very slow arsenic euphoria builds. Then fearfulness hits, and it comes down very sharply. When I started to look astatine that, I was sort of intellectually shocked. Contagion is nan captious arena which causes nan point to autumn apart." - Fed Chairman Alan Greenspan

Like galore games of chance, Poker is simply a crippled wherever you tin importantly amended your outcomes by sticking to nan odds. Many of nan champion Poker players won't play a manus unless they're reasonably assured they will win. When you're playing successful a tourney pinch a batch of different players, playing conservatively will usually consequence successful a overmuch amended outcome.

The Action Network, How To Play Heads Up Poker

However, erstwhile engaging successful "Heads Up Poker," with only 2 players, nan likelihood are shifted wholly connected their heads. Optimal strategies wildly change, and hands you would ne'er want to play against aggregate different players are abruptly successful play.

Of course, nan psychological constituent becomes paramount erstwhile only playing 1 different player. Because of this, galore players play very aggressively and stake wildly. This tin shingle up nan opponent, but it tin besides create an opportunity for them to "catch nan bluff." Unfortunately, while Fed Chairman Jay Powell played his manus well, nan SP500 (SP500) will apt beryllium a casualty successful nan short word arsenic a consequence of this move of events.

Jay Powell conscionable caught nan enslaved market's bluff. And nan consequence is simply a bully point because now nan Fed has much credibility, and nan marketplace will beryllium much inclined to fto it do its occupation successful a much regular fashion. Of course, this isn't a bully point for nan S&P 500 because nan enslaved marketplace and nan Fed person agreed connected higher for longer now. Thus nan banal marketplace seems to beryllium a spot up of itself, fixed that nan consequence to nan terminal complaint is apt to nan upside. Bullard's and Mester's comments suggested truthful and:

• CPI came successful hot
• PPI came successful hot
• Persistently beardown labour market
• Energy prices stay volatile
• Ukraine War escalating

You see, galore had been postulating nan Fed would perpetrate a argumentation correction that mightiness lead to a monolithic sell-off, possibly moreover a depression! The enslaved market's divergence from nan dot crippled was 1 of nan superior feathers successful their cap. But this isn't your grandfather's Fed. Since nan Dodd-Frank Act, nan FOMC is simply a batch much assured successful its expertise to forestall nan type of financial contagion that Chairman Greenspan lamented successful nan quote supra arsenic what causes things to "fall apart."

BCG Analysis

So while Powell and friends whitethorn beryllium very willing successful what nan enslaved marketplace has to opportunity and usage it to pass their policy, it's important to retrieve that he doesn't look astatine things nan measurement markets do. And Powell is very focused connected ensuring that neither he and his deputies nor thing other origin a wide forced liquidation for illustration that which occurred successful nan aftermath of Lehman's collapse. With contagion little apt than successful nan past, aliases astatine slightest pinch a much complete toolset to woody pinch it, Powell knows his manus is much robust than immoderate successful markets would postulate.

The Fed Chair has a much tremendous work than astir of america could imagine. He besides has a batch much devices astatine his disposal than his predecessors. Powell conscionable seized nan inaugural from nan enslaved market, though, and nan astir desired "soft landing" is seeming much imaginable than ever. Flush draw! Powell has now established immoderate breathing room and credibility for nan FOMC, though, arsenic he fto nan "cards" speak for themselves.

Powell's Slow Play

Many bears mightiness person been wondering Jay Powell didn't return 2 caller opportunities to bring retired nan belt, for illustration he has connected aggregate occasions this year, to fto markets cognize he didn't admit them going up truthful much. Instead, he declined to demur nan caller gains and successfully transferred nan Fed from being occurrence and brimstone to beryllium limited connected nan data.

The occurrence and brimstone Fed accomplished its ngo of keeping ostentation expectations anchored. Now, a much reasonable Fed tin guarantee it doesn't repetition its mistakes nether nan ungainly Chairmanship of Arthur Burns without nan 75-point theatrics. Having successfully made nan pivot (probably a mediocre connection choice) from occurrence and brimstone to information dependent, now nan Fed is successful an advantageous position. In Poker parlance, it has "the nuts."

Why? Because nan Fed's mentation of nan information is nary longer nan focal point, for illustration erstwhile "transitory" was nan buzzword. Its credibility is nary longer nan rumor astatine liking for markets; nan information is. The world's astir consequential cardinal slope is overmuch much attuned to what's going connected successful nan system and financial stableness indicators, and a "black swan" clang arena seems highly improbable fixed really capitalized banks are and nan extended thirteen-year-old solution powers that nan Fed has astatine its disposal (Title III of nan Dodd-Frank Act).

As Powell himself has said, nan Fed would alternatively overtighten and correct it pinch its shiny caller suite of post-Dodd-Frank tools, which person proven their mettle, arsenic good arsenic nan aged "cut to zero" information switch, than beryllium complacent connected ostentation excessively early. Expanding connected nan oft-cited punchbowl metaphor, I telephone it nan "bender of past resort." One communal bias among those successful markets is that nan backstage broadside of nan obstruction is ever up of nan nationalist side. Jay Powell's poker prowess has proven this is not ever nan case, peculiarly erstwhile anomalous events for illustration COVID and nan associated stimulus person surgery nan business cycle.

Atlanta Fed Market Probability Tracker, 12/18/23

And nan data, unfortunately, isn't rather going on pinch nan bullish narrative. This makes Powell's behaviour look very credible, possibly moreover much truthful than if he has bashed nan banal marketplace into submission. For he knows a Fed Chairman should ne'er needlessly squander governmental superior and nan bully graces of nan peanut gallery.

The important divergence betwixt Powell and nan enslaved marketplace that existed astatine nan opening of nan twelvemonth has now closed. Jay Powell won a important manus successful his (highest stakes ever) crippled of heads up Poker against nan enslaved market. While nan enslaved marketplace often has nan Fed's number, specified arsenic successful nan run-up to post-COVID inflation, Powell seems to person learned a thing aliases two. The marketplace was pricing successful cuts successful 2023 for nan first portion of nan year, and now it is pricing none.

Atlanta Fed Market Probability Tracker, 02/17/23

I'll confess Jay Powell outplayed maine arsenic well. In my 2023 Outlook, I stated that I tended to sympathize pinch those who thought nan Fed would beryllium forced to pivot sooner than nan December dots suggested. Good point that though I'm dumb capable to make a forecast, I don't make my agelong picks contingent upon specified an outcome. This is why I've picked longs insulated from 2023 risks by utilizing nan criteria of highly visible and accelerating earnings, dependable drivers, and beardown competitory positions.

1. Raytheon (RTX)

2. S&P Global (SPGI)

3. American Tower (AMT)

4. General Dynamics (GD)

5. Albemarle (ALB)

The "Trinity" of Fed Mandates...

Wall Street commentators are often fixated connected nan Fed for a bully reason. If nan system is simply a farm, you could deliberation of nan Fed arsenic controlling nan rain. But nan Fed doesn't attraction each that overmuch astir stocks. Since Equities are inferior successful nan superior structure, shareholder losses airs little of a threat to financial stableness than seized-up in installments markets.

But nan Fed is conscionable good letting nan banal marketplace fig retired that rates will spell higher for longer now that nan ostentation exigency is little acute. Why micromanage and tie nan ire of nan folks? Powell sewage precisely what he wanted and didn't person to bash nan market; he conscionable fto nan enslaved marketplace support "raising," knowing he had nan amended hand.

We often attraction connected nan dual statutory instruction cited by Fed officials. Still, different captious constituent of nan Fed's occupation is overlooked: its domiciled successful assuring financial stableness and acting arsenic a lender of past resort. As a Catholic, I deliberation of this for illustration nan mysterious Holy Spirit of nan Fed's "trinity" of mandates. Promoting financial stableness is astatine nan halfway of nan Fed's ngo and besides astatine nan halfway of its expertise to usage its astir effective instrumentality (the Federal Funds Rate).

Financial stableness and acting arsenic nan lender of past resort, successful fact, was nan r'aison d'etre of nan Fed erstwhile it was initially conceived. This hallowed ngo remains cardinal successful nan minds of those who service connected nan Federal Open Market Committee. The Federal Reserve supervises banks, conducts nan yearly Dodd-Frank Stress Test, and useful to beforehand financial stableness done nan Financial Stability Oversight Council. This gives it an separator successful accomplishing its mandates galore marketplace participants underappreciate.

Conclusion: With Bond Market Capitulation, S&P 500 Looks Dangerously Exposed

We besides thin to hide that nan marketplace didn't ever expect nan Fed and alternatively conscionable responded to unfastened marketplace operations erstwhile they occurred. Powell has antecedently opined connected this move and lamented really difficult it makes doing his job. However, nan truth that he called nan enslaved market's bluff and that it is now beautiful overmuch precisely successful statement pinch wherever nan December dots are, is awesome and makes nan Fed's occupation easier.

The rhetorical task of a Fed Chairman is often arsenic impactful arsenic it is delicate. This was highlighted splendidly erstwhile Powell fueled a rally successful nan mediate of 2022, only to travel retired swinging nan bazooka astir astatine Jackson Hole and each consequent Fed gathering since. That is earlier nan past Fed gathering connected February 1st.

Rather than pursuing nan erstwhile script, which galore investors expected him to do, Powell declined to indict nan caller rally. He bobbed and weaved erstwhile asked whether financial conditions had gotten excessively loose: perchance loose capable to undermine nan conflict against inflation. In retrospect, Powell seems to person played his manus of heads-up Poker (of nan highest stakes possible) pinch nan enslaved marketplace rather masterfully.

The enslaved marketplace has capitulated to nan Fed. Stocks are now sitting connected a coagulated rally that is lacking basal support. For each of 2022, arsenic rates rose, valuations were compressed. An underpinning of nan bullish script seemed to beryllium that Powell would trim successful 2023. However, this seems highly unlikely, fixed nan caller information and Fed commentary.

Yardeni Research

Now, nan banal marketplace mightiness beryllium looking guardant and expressing alleviation astatine better-than-expected net and a resilient consumer. However, fixed nan spot of nan gains and nan evaporation of hopes for a dovish pivot successful 2023, I find it astir apt that nan S&P 500 will acquisition important weakness complete nan adjacent fewer weeks.

As you tin spot above, location is simply a divergence betwixt nan PE of nan marketplace and nan 10-yr TIPS yield. I deliberation it is highly apt that nan S&P 500 will spot its P/E ratio trim to bespeak nan higher yields. The market's consequence to Bullard's and Mester's hawkish commentary connected 2/16 suggests a alteration successful characteristic from nan ebullient commencement to 2023, which, unfortunately, will apt persist astatine slightest for nan coming fewer weeks.

I was Senior Writer and Vice President astatine Fundstrat Global Advisors for complete 2 years. Prior to that, I was Senior Research Analyst astatine Dentons, now nan world's largest rule firm. I attraction connected institution management, fundamentals, earnings, contrarian investing, and nan effects of geopolitical developments connected consequence assets.