Watch Out for the Wrecking Ball
Team Transitory, you've been looking in the wrong direction.
Key Themes & Positioning
China QE should be on everybody’s radar.
JPow is flip-flopping again.
A wrecking ball is back from the past with a vengeance.
Inflation is simply not transitory, but disinflation is.
Positioning is as follows:
Initially in oil/cl at CL 69.80. Added May call spreads at CL 75.57.
Long June ‘24 QQQ Put spreads at 444.87
Long June ‘24 TLT puts at 94.60.
I hope everybody enjoyed their weekend. Some interesting things happened since my last post. Namely, Biden deciding to make March 31, 2024 — which just so happened to be Easter this year — a Transgender Day of Visibility, Xi flirting with starting QE, and JPow flip-flopping once again.
As for Biden’s declaration, I think this is a clear sign of a decaying, decadent, and spiritually broken nation from the top-down — and America’s adversaries know this well. It’s too bad some Americans can’t see it. Not much else to be said on this matter.
China QE? This is NOT a Drill (maybe lol)
Onto a less serious, but still meaningful matter. On Saturday, Xi alluded to restarting purchases of China’s treasury bonds — a means of injecting liquidity into the economy, or QE for short. This would be the first time that the PBOC did this in more than 20 years. A few days after this, China’s PMI readings came in scorching hot. Their markets surely liked this news, and I believe commodities did too. After all, China’s reopening process was never about the reopening, but always about the rebound. Taking a bit from a post back in August:
China will stimulate their economy. They have to. It probably won’t be as aggressive as the West’s stimulus, but it will suffice. This is why I said that they are reopening at a precarious time for the West back in December. Their reopening was always going to be accompanied by stimulus, and there’s probably no better time to stimulate then when the US is approaching the “end” of its hiking cycle. Consequently, commodities will continue their ascent as the 2nd wave of inflation makes its presence felt.
And a bit from a post back in September:
China hasn’t collapsed like every Western pundit has been forecasting since 1989, and much to my chagrin, evidently much more so recently. In fact, they implemented numerous stimulative measures recently that have unsurprisingly slipped under the radar.
The stimulative measures implemented at the time (can be found in that post) made no mention of seriously supporting the Chinese stock market, so naturally they were overlooked by most. Just a few months back in late January, when Asia Genesis was forced to closed down due to poor performance on the long China/short Japan trade, the HSI was at a do-or-die level. It’s clear that China doesn’t put nearly as much importance on asset prices as America does, but it was getting to be too close for comfort for China’s policymakers in my opinion. I think that — along with the “mission accomplished” vibe from the Fed — is a big reason why more serious stimulative measures are being announced. And I know that it’s an unpopular opinion to believe that China is engaging in economic warfare with the US, but it appears to be the case irrespective of what anybody says. I will reiterate:
Lastly, on this note, the stimulus package dropping anytime in the near future would be, in my opinion, impeccably timed since the “transitory” crew is out in droves, rate cut expectations are as high as they’ve been in a while, and inflation in the US looks to have reached a trough.
That’s all for now on China. I’ll be sure to keep an eye on Xi.
Jerome Powell is Back Baby
The old JPow that I know so well is back. Instead of choosing the March FOMC to flip-flop at, he waited until his interview at the Macroeconomics and Monetary Policy Conference on March 29th. Very sneaky of him. At this conference, he said, and I quote:
“This economy doesn’t really feel like one that is struggling with current rates.”
This is not the JPow that I saw on March 20th at FOMC — no sir, not at all. I was told that rates were in restrictive territory. This is not what I signed up for. I mentioned in my last post that the Fed being super dovish right now is not as bullish as some think. And that positioning in the momentum trade is far too crowded to be so bullish. I know it’s only April 2nd, but let’s take a look at current conditions.
SPX is below the October trendline.
Oil has broken a very important trendline.
And so has the USD. This is starting to look a little too familiar, isn’t it?
If not, allow me to elaborate. From April 1st to today (as I’m typing this) , the 10y yield is up about 16bps, while the 2y yield is up about 9bps.
The bear steepener is back! It’s about time. In hindsight, I probably should have waited for this to occur to pull the trigger on shorts. Regardless, the wrecking ball is back with a vengeance. This continues and it’s lights out for risk.
TLT *checks notes* just closed at a new low of the year. That is, in fact, lower than it was after the hot inflation readings that JPow so gracefully deemed “bumps in the road.” Let’s take a look at Nas, which I mentioned looks notably weaker than SPX was and is consequently a better short for me this time around.
Still looking pretty weak. So weak, that I grabbed some June QQQ Put spreads.
After all, it’s all about the wrecking ball now. Mark your calendars for April 10th. It’s an important day ;)
Team Transitory…It’s Been Over for a Long Time
I’ve made comments pertaining to team transitory in the past — some off here and some on — but I’d like to take some time out once again to make myself clear since there’s so much gaslighting going on. There is nothing transitory about inflation. There never was. “Transitory” was clearly defined for us in the 2021 September SEP from the Fed. Their projections — after months of declaring inflation transitory — were as such:
Rates unchanged through 2021
Rates up only 25bps in 2022
Annual inflation for 2021 & 2022 at 3.4% & 2.1%
Expecting inflation to return to 2% quickly
Annual inflation rates for 2021 & 2022 were 6.2% and 5.4% respectively, while rates rose at a historic pace in 2022 as a result of them being so firmly behind the curve. Lastly, inflation is still not at 2%. Thus, it is not transitory. We can move on from these pointless arguments now.
Until next time,
Pierre.