The Ghosts of Christmas Past

Jerome the Grinch or Jerome Claus?

I’ve been getting vibes of December 2021 lately. At the risk of following my own bias, I had to revisit that period and make sure I'm not re-enforcing some mistaken perception. Since I went as far back as Dec 2021 I thought I’d revisit Dec 2022. They both feel so long ago!

Lets just consider one and only one chart: Nasdaq vs US CPI. That’s it. We will ignore the rest, so we can build our own Xmas story of Ghosts of Christmas Past.

December 2021

Nasdaq was bubbling at the highs and crossed >16,000 while CPI was above >7% and RISING!

The Fed met on Dec 15 and, of course, given CPI was at 7% they decided the prudent course of action was to keep the interest rate near ZERO!

In Jerome’s words at the time:

“Like most forecasters, we continue to expect inflation to decline to levels closer to our 2 percent longer-run goal by the end of next year. The median inflation projection of FOMC participants falls from 5.3 percent this year to 2.6 percent next year; this trajectory is notably higher than projected in September. We understand that high inflation imposes significant hardship, especially on those least able to meet the higher costs of essentials like food, housing, and transportation. We are committed to our price-stability goal. We will use our tools both to support the economy and a strong labor market and to prevent higher inflation from becoming entrenched.”

Incidentally, the Nasdaq FELL by 4% after the FED, then rallied by 6%, closed the year at the highs and puked in January. Here’s a zoom of those fateful days in Dec 2021.

Today we are back at the same level for the Nasdaq as 2 years ago. Congrats to all.

In summary, in December 2021 the market was euphoric, rates were at zero, CPI was roaring hot and the Fed was telling everyone they will act on inflation. Powell was preparing everyone by dropping the word “transitory” on inflation and was guiding about accelerating the winding down of asset purchases (remember the word “tapering” ???).

The drop in the market was short-lived as the Market Monkeys were euphoric and ignored all the warnings only to wake up to a harsh reality in January 2022. After all, bonuses and performance fees are set as of Dec 31 so that’s all that mattered to them.

(Incidentally, at the same time a shrub predicted that Elon Musk would buy a stake in Twitter and the rest is history. Parody meets Reality! )

December 2022

The Fed meeting of December 2022 was quite special. Once again, the Market Monkeys had high expectations for a “Pivot”, even though Inflation was at 6-7%.

So JPow came with a <Pow><Pow><Pow>, raised rates by 50bps to the “highest level in 15 years” and said in his prepared remarks:

“Inflation data received so far for October and November show a welcome reduction in the monthly pace of price increases … But it will take substantially more evidence to have confidence that inflation is on a sustained downward path.”

Naturally that made for a terrible Xmas for the Market Monkeys with the Nasdaq down 8%. That made for an abysmal bonus season in 2022.

Back then that I did a pretty stupid thing and got 90% invested and entered 2023 as long as I could. The rationale was that everyone de-risked and we were bound to have a relief rally. I raise my hand to admit I didn’t expect it to get THIS much of a relief!!

December 2023

And here we are again. Another crazy year comes to an end.

And I must admit I’m kinda lost. Which is why you have to suffer through reading my Shrubstacks as I try to figure things out!

Here’s how I see it:

Yellen is on a path to “Save the Ponzis, in order to save the Plebs” (seminal Shrubstack piece here ). She wants to keep things hot and bubbly. It serves her purpose(s).

Jerome on the other hand, is on a fine line here. Employment is strong, Inflation is still at 3.2% but trending downwards and will probably get a sub-3% print in the not-so-distant future.

So the pressure that Jerome felt in 2021 and 2022 is simply not there. He’s probably quite relaxed this time round.

Now Jerome is a smart man. He knows that bubbly asset prices can end in tears (after all, he’s done a few bubbles himself by now!), so my guess is that during the next Fed meeting he will try and sound as hawkish as he can.

One of the tools he has is through the dot plots, which to be honest is as accurate as a bunch of monkeys throwing darts on a board. For example, the December 2021 dot plot showed expectations for the fed funds rate to be at 90 bps by December 2022. By December 2022, the fed funds rate was actually 4.25% - 4.5%. Talk about a miss!!!

So they’ll throw a bunch of dots and say they are hawkish, but I reckon the market will assume that Yellen has their back.

It’s a tough one.

Recall in December 2022, investors were properly de-risked to enter 2023 with VERY low equity allocations. The setup seems the opposite this time round.

But also recall that in December 2021, the market was quite volatile before and after the Fed and showed its TRUE trend in January. But also recall that in 2021 the Fed had to deal with RISING inflation and now they are dealing with DECLINING inflation.

I reckon we probably need to first clear through all this year-end nonsense . Not saying this is bullish or bearish, just saying I’d like to first see if we are dealing with a Grinch or with Santa Powell (or is it Santa Yellen?!).

Disclaimer:

This isn’t financial advice.

This is the trading blog of a shrub.

By now you should know: Don’t be Stupid.

Like, seriously … Don’t be stupid …