This FED is done – Sep 8th 2023

Ah, in a past life, I had the privilege of hobnobbing with a bona fide sausage maker at the Federal Reserve. Now, before you nod off into a nap of indifference, let me serve up a succulent tidbit I gleaned from the venerable Ben Bernanke himself: “The Feds main job is to communicate, not cause panic…market participants should listen”.

Fast forward to today, and I’m still savoring every word of those FOMC minutes and parsing the delicate nuances in their pre-scripted speeches. My latest verdict after Powell’s Jackson Hole serenade? The hiking fiesta is, well, over. Despite the Fed’s mixed hints at needing to do “more”, it’s essentially a waiting game now. And the longer they can wait without triggering a catastrophic meltdown the better (a.k.a., a “soft-landing” and the market consensus). A modest 25-basis-point hike in September? A mere blip. 50? A stretch. Anything more? A recipe for a financial fiasco that will have Fed officials cleaning out their desks into the next election cycle.

Remember when the regional banks bailed out 75bps ago? Yeah ,that was a telltale sign. The big boys ( i.e. J. Dimon and co) are now clutching onto their bags of discounted treasuries as Basel III regulations threaten liquidity reserves, a slew of corporate expirations roll in [roughly 2T worth], and a seemingly endless and growing supply of government debt hits the market. The plane might just land, but who’s left on board? I reckon the Fed doesn’t fancy finding that out either. Add softer trending economic data to the mix, and you’ve got a no move, bear down rate decision as officials go radio silent until their upcoming September 20th meeting.

So, here we stand. Equity risk premiums and volatility are lounging at their lowest, credit spreads are itching to explode, and, despite rosy growth forecasts, the average Joe is feeling the pinch, bit by bit. The global stage isn’t any more reassuring. Asian economies pondering stimulus, Europe huddled in a soon chilly slump, and team BRICS recruiting new players holding sizeable commodity reserves (including Argentina). A real Messi situation, isn’t it?

But here’s the silver lining: Uncle Sam has stacks of government debt to sell, and they’re practically begging for takers at these sweet interest rates. The peculiar strength in the dollar this week is likely an indication that the market has positioned to take down this supply. Once that’s been dealt with, we can gently dust off the “risk on” playbook. We’ve been banging this drum for ages now, and honestly, not much has changed in our data, our philosophy, or our general modus operandi. Snatch up the scarce and sought-after. But don’t overpay, stay thrifty! Complacency? That’s an extravagance we can’t afford. And, when you spot low-hanging fruit, don’t hesitate—back up the truck and load up

Enjoy the weekend!

** Commentary from RCG Portfolio Managers
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** Dynamic Macro Strategy
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This strategy relies on historical data and quantitative techniques to detect statistical disparities and make predictions in global markets using highly liquid global, broad, sector, commodity and fixed income ETF’s.

“Geo-politics and central bank policy divergence has once again distorted shorter correlation dynamics. The greenback regained strength to peers as China growth concerns and higher US rates dominate global money flows. Asian economies favoring stimi’s should benefit short term over those still in contraction mode and the EU is first in line for contagion effect. While cautious on risk sentiment, we await entry points to re-engage with core and periphery EU markets. ” – Nick Diaz

** Inflection Strategy
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The strategy takes positions in highly out of favor US equities which we believe are inflecting due to changing fundamentals, events or cyclicality.

“The oil market remains tight with OPEC+ announcing their production cut extension into year end and rig counts bottoming in the US market after two consecutive Baker-Hughes reports. Currently, the world is undersupplied by roughly about 2mm barrels per day and the commodity has inflected higher in price over the last three weeks [WTI @ 87p/b]. The portfolio holds the high skew risk/reward single name stocks in the energy sector and it continues to carry this overweight sector position.” – Stefan Lingmerth

** Safe Haven Strategy
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This strategy protects capital during inflationary environments and seeks to maximize yield using fixed income instruments and defensive assets, such as metals.

“Wild moves to say the least, but real rates are still tracking higher as core CPI stubbornly subsides. We’ll continue to exploit the policy makers and media debating the “hold, 25 or 50bp” rhetoric as the market finds footing within the last Jolts vs Payroll ranges. We’re running 1.75yr duration in the book and will keep slowly extending as our bills keep rolling off. With a record amount of debt hitting the market next week we can afford some patience to secure higher yields in our favored sector of the yield curve before initiating new longs. ” – Nick Diaz