Self Esteem
*YELLEN: “THE US NEEDS SIGNIFICANT STEPS TO REDUCE THE BUDGET DEFICIT”
*JPOW: “I DON’T SEE THE ‘STAG’, I DON’T SEE THE ‘FLATION’”
“I wrote her off for the tenth time today
And practiced all the things I would say
But she came over I lost my nerve
I took her back and made her dessert”
- The Offspring, “Self Esteem”
Sometimes I feel that the Mission Statement of Shrubstack is to reveal how absurd our financial system is, and at the same time demonstrate that we can profit handsomely off this absurdity.
The easiest way to profit from the Markets is this:
Buy stocks that you like when they are at a level you like
Then sell them when they go to a level you don’t really like any more
Rinse and Repeat
Ignore all the complicated nonsense in between.
The same applies at the Index level, though there unfortunately we have to think of all the complicated nonsense in between just a little bit more.
In April 19th, we positioned for a bounce and the S&P proceeded to have a nice run of +3.5%. Then in “The Pain Trade” just two days ago and following a “hawkish” QRA, we advocated hedging by illustrating with the chart below.
The Nasdaq proceeded to sell off by 2.5% in just a day, doubling the value of our hedges. We crystalized the profits of the short-dated puts (2x in a day you take the money and give thanks!) but kept some longer-dated put spreads on.
What Next? - First, a Summary
To understand what comes next, lets do a quick recap of the QRA and the FED.
Regarding the QRA, Yellen will borrow more than expected (hawkish) but the “Treasury does not anticipate needing to increase nominal coupon or FRN auction sizes for at least the next several quarters.” (neutral). Translation: Yellen will borrow more but she’ll keep the supply of bonds constant. Impact on risk? Not much, move on.
Regarding the Fed, JPOW was balanced as we anticipated. On one hand, the Fed inserted a new sentence that “in recent months, there has been a lack of progress toward the Committee’s two percent objective.” It’s a strong sentence that raises the bar to cutting rates in the near term, but it’s something we all knew and there were those who feared that JPOW would bring back HIKES to the table. He promptly dispelled those fears by saying that “it’s unlikely that the next policy rate will be a hike”.
JPOW, when asked about Stagflation, said that he “didn’t see the ‘Stag’ or the ‘Flation’”. Given this statement comes from the same team that predicted back in 2021 that Inflation is Transitory, I couldn’t help but think of the scene below from The Hangover. It also got me worried that Stagflation is probably what we will end up with, since he so promptly dispelled those fears…
If you think this is all too confusing, spare a moment of silence for those 0dte Osbournes who blew up their accounts yesterday while attempting to trade this Theater of the Absurd.
