Well that was easy! All it took was a full scale Russian invasion of Ukraine in combination with run away double digit inflation across the entire Western hemisphere for our friends at the Federal Reserve to jump into action and raise the FFR by a whopping 25 basis points. Undoubtedly that should do the trick and I am very much looking forward to paying $3.00 at the pump again as early as next week. For one liter that is – not one gallon.
I have long given up trying to make sense out of the giant mess the world as a whole now seems to have maneuvered itself into. While the respective political camps are engaged in an information war eager to point fingers at each other keep in mind that none of that will change the realities on the ground. Which are now becoming ever more sinister by the day. It is my sincere belief that a large part of what is currently unfolding is self-inflicted and the direct result of a long and apparently never ending sequence of bad decisions, all of which are now in the process of converging into an economic disaster of biblical proportions.
If there’s one salient lesson I have learned in my life it’s that most people are completely wrong most of the time, especially when it comes to assessing the importance and future outcome of current affairs. I know this may sound somewhat elitist but it’s an all encompassing observation I have made on numerous occasion in my life, and as such it has become a core tenet that in year’s past has saved me from financial ruin many times over.
If you are new to trading then you may be wondering what all those red candles mean you suddenly keep seeing all over the place. Well, let me tell you a tale of a long forgotten place and time when market corrections were a regular occurrence and served to prevent excessive greed and hubris to prolong for more than mere fleeting moments. The rare times it happened were feared by all but then quickly ignored and soon forgotten nonetheless. This cyclical ebb and flow of the financial markets worked well for a few centuries until one day back on September 15 of 2008 when the Federal Reserve decided that market corrections were a thing of the past and thus henceforth were considered ‘verboten’.
It’s finally official: Inflation is out of control with last week’s consumer price index (CPI) reporting a jump to a whopping 7.5%. This is the fastest surge in the past 40 years but let’s not kid ourselves, that is AFTER the numbers have been thoroughly massaged and finagled to look as rosy as possible. The truth is most likely much more dire. I personally would pin running inflation at 10% or perhaps as high as 14% simply judging by fuel prices as well as basic cost of living expenses which continue to explode higher.
When I started this digital den of market domination in early August of 2008 I could not in my wildest dreams have imagined the decade long bull market that would end up grinding even the staunchest of perma-bears into the ground. Of course none of that could have ever happened without a little help from our friends over at the Federal Reserve. The now commonplace axiom of “don’t fight the Fed” had not yet entered our contemporary vernacular and thus many reasoned heads first had to roll before the market embraced a new paradigm driven by quantitative easing and various FOMC operations aimed at painting an infinity-put under the equities market.
I promised you a turbulent trading week and at least on that front the market did not disappoint. Once it was done punching itself in the face a few brave bulls valiantly stormed into the ring and began to smash the referee with folding chairs. In all the chaos and commotion buyers with deep pockets somehow managed to stage a last hour stick save, pushing the SPX back toward 4,420.
The third week of January 2022 will be remembered as the moment when Lucy finally was handed her well deserved comeuppance. And when I speak of Lucy I of course mean Jerome Powell and his esteemed colleagues at the FOMC. In other words once the realization of higher interest rates and a veritable avalanche of corporate credit defaults fully set in, the equities market decided to send Powell a clear message ahead of this week’s FOMC announcement.
Since early November equities have been stuck in what seems to resemble Lucy Van Pelt’s purgatory of pain. Alongside a marked increase in volatility the SPX managed to heave its battered carcass to new ATHs on January 4th, only to immediately fall back and paint what is now increasingly looking like a topping pattern. The situation is looking serious but I cannot help but think that we’ve all seen this same type of setup all too often over the course of the past two years.
You know the old saying – if it looks like a duck, walks like a duck, and quacks like a duck, it’s a donkey. Okay, maybe I got that one mixed up – but that’s the sort of rational thinking we’ve come to expect from the equities market for well over a year now. More specifically as equities crawl their way higher month over month implied volatility continues to range in ‘problem space’ territory.