Market Tests Powell

Dec. 18, 2018 8:11 PM ETSPY, UUP, TLT, HYG, AMZN, NFLX, META, GOOGL, MU, SMH4 Comments
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Long/Short Equity, Contrarian, Portfolio Strategy, fusion trading

Contributor Since 2017

Arun S. Chopra CFA CMT MBA began as a research analyst in the Biotech sector. Arun has worked in wealth management, specializing in portfolio construction and hedging solutions, with a special emphasis on alternative investments. 

He has worked closely with alternative asset portfolio managers, hedge fund traders, and investment advisors on everything from single stock processes to longer term allocation decisions. 

He has earned both the CFA and CMT charters, with an MBA from New York University's Stern School of Business. His undergraduate education includes a study abroad program in micro and macro economics at Oxford University. His work has been published in the MTA's Technically Speaking. 

Outside of Finance, Arun spends considerable time in the independent film industry, having associate produced two full length features, Punching at the Sun (Sundance 2006, Best Picture SF Asian American Film Festival 2006 ), and Chee and T (Best Comedy LA International Film Festival 2016).

Summary

  • Fed Pulls the Punchbowl.
  • See the process by which QE impacted liquidity.
  • Market test Powell as we head into tomorrows Fed meeting.

Hi Everybody,

The Fed meets tomorrow with perhaps one of the most important meetings in some time. For those who have been following my work they know I have been fairly critical about the Fed's path for some time.

Although rates have been too low for too long, the aggressive moves all year have accelerated the rate of change in the 2 year yield and put pressure on many markets. 

You can read more about what I said in my November article, The Fed Pulls the Punchbowl.

As the Fed continues to seek 'normalization' I wanted to share a chart I made a while back showing how excess liquidity was created in the market over the last 8 plus years. Some actually attempted to debate the below, but the reality is liquidity impacts are real. This year has proven that fairly strongly. 

As we head into tomorrow, and after doing this for a few decades, I am always amazed with the push/pull between financial markets and the Fed. For all the volatility this year, the real concern for me has been just how far the Fed will go. We've seen the yield curve come in, we know commodities are falling. Oil was down another 5% today. And here we are, with the market putting the February lows right to Powell. This is his first real test.

With a 98% probability to raise going into tomorrow, the likelihood of a pass is low. It would be too detrimental to the Fed's credibility. That said, the communique should be interesting. For those who want to get a sense of just how much the Fed worries about the market (and the current levels) and how far Powell is willing to be pushed around by it, that is the area to watch (post decision communique, guidance).

Thanks for reading...

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