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Fed Post-Mortem; Thoughts on a “Going to the Mattresses Portfolio”

Chris Temple 0

(Thursday morning, Dec. 20, 2018) --

 

As I said on YESTERDAY'S MARKET CLOSE wrapping up a Fed statement (and Jay Powell presser) that clearly did NOT put the markets in a Christmas spirit, it's not as if the Fed chair didn't deliver what he thought was a fairly "dovish" rate hike.
Indeed, Powell went to some considerable length to all but promise that--if economic news continued to weaken, and/or troubles elsewhere got any worse--yesterday's hike may well have been the last one for a while.
"I think from this point forward, we're going to be letting the data speak to us. . .there's a fairly high degree of uncertainty about the path and the destination of any further rate increases," Powell said, among other things hearkening back to 2016 when an optimistic Fed prior had forecasted four rate hikes but only pulled off one that year.

Those comments were not enough to please the markets, though; chiefly because, as you'll hear, he was immovable on the subject of the ongoing net $50 billion/month reduction in the Fed's balance sheet.
 The first tentative sign this morning that some of yesterday's immediate, nasty reactions to Powell's press conference were--as they often are--fake-outs is this morning's sharp drop in the U.S. Dollar Index. First off, of course, that happily ratifies the one small portfolio move I did urge pre-Fed yesterday, even as I was too squeamish (and correctly so) to go any farther out on other limbs.
It also seems a "vote" on currency traders' parts that whether Powell intended to convey more dovishness in the end or not, the markets and circumstances will drag him in that direction sooner rather than later anyhow.
Separately, I'll have more guidance and specific moves for Members before too long; but for the moment, nothing major, I.M.O., to fret over that we already haven't!
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David Tepper (above),  "arguably the best hedge fund manager of his generation" according to Forbes (and among other things, also a philanthropist and owner of the Carolina Panthers) is out with a sober list of his own four main post-F.O.M.C. points this morning.
Yours truly, of course, will have a lot to say on these and related subjects in the days ahead as well, as we sort through what for all practical purposes is the first cyclical bear market for stocks since the late 2015 - early 2016 period. But for now, just a few thoughts for all of you, on Tepper's four points first and my own "take" --
     Tepper #1. Powell basically told you the "Fed put" is dead.
For the markets it is indeed at least dormant. But not necessarily for the economy, as Powell sees things. Yesterday, the Fed chief DID, as I pointed out, go quite a ways to assuage fears over the Fed's rate hike path, strongly suggesting that--though not now promising this outright--they may well pause if the "incoming data" required it, as in 2016.
But as I said on the podcast, Powell did seem to reinforce the fact that he doesn't feel obligated to save investors in the stock market from an overdue mean reversion.
Morally, as with his boss' stance on the China trade war, he has things right.  But as with Trump if things go too far with China and that country gets pushed off a cliff (and takes the rest of us with it) Powell's attempt to sober up markets could also blow up if he's not careful; that "Monetary Jenga" game might be continuing.

 Tepper #2. Everyone is tight. Chinese money growth plummeting. ECB cutting the last of Q.E. And the Fed still in tightening mode.
All basically true right now, BUT as I have also pointed out lately, the E.C.B. especially is being disingenuous. It's already via a series of winks and nods made very clear that, through various open market operations, it will be making up for no new net Q.E. purchases by continuing to paper over the eurozone's myriad messes out the back door.
China, as you know, remains the Number One candidate for the country that will have a crisis and drag us all along for the ride. While the government is trying to keep all the balls in the air, economic growth and most shadow banking credit growth is, as I pointed out in the latest issue, pretty much at a standstill. More worrisome still is if capital flight resumes in earnest from China.
 Tepper #3. The net biggest issuance of Treasuries and worldwide fixed income is coming next year. Something is going to get crowded out. Bonds, stocks, etc.
As I'll be discussing in my next issue coming out imminently, this is why (though they did manage a sharp rally lately) I'm squeamish about going "long" Treasuries yet.  And this is also despite the point I made on yesterday's podcast on them specifically.
My view is that we are going to see credit spreads widen substantially.  On most everything BUT Treasuries and other major sovereign debt, Tepper is absolutely right.
Tepper #4. Oh, and there is this trade war question. I think we should be having a fight with China on different issues. But it is not conducive to confidence.
Absolutely right...and you know all I've said about the Trump Administration's very risky gambit here, especially with some of those advising The Orange Wonder wanting to really cripple China.
One realistic hope which Tepper implies is to bury the hatchet and fix things on merchandise trade/tariffs and the like (several steps have already been taken in this direction, especially by a weak China that wants an end to this) to remove that as a global economic/markets threat.  Separately, work on the thornier issues of forced technology transfers, I.T. theft, etc.
Were that to happen, it would go a long way to lessen market fears and especially lessen the stresses on China.
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"Cash is not so bad," Tepper added to all the above (and, of course, that's why our recommended portfolio cash positions of late have been pushing 40% for Growth accounts and 50% for more Conservative ones.)
 Indeed, a quip I just roared over yesterday came from one of CNBC's pundits, Guy Adami, who surmised that it might be wise to come up with more of a "Going to the Mattresses Portfolio."
That crack, as you fellow junkies of The Godfather trilogy already know, implies hiding out in a safe place where you can't be found or harmed.
Stay tuned for more thoughts on that, Members, as we do some more work on our overall portfolio allocations/holdings in the near term!

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