The Market’s Window Of Inflation

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Fed Trader Chaim Siegel discusses fundamental and technical bullishness (0:35). CPI perfect numbers, Fed hiking, fighting inflation and bonds (4:00). This is an abridged conversation from a recent Investing Experts podcast.

Transcript

Rena Sherbill: Chaim Siegel, the listeners know you, you run Fed Trader. Oftentimes, you’re on here talking about macro topics.

You were talking about how you were going to be bullish with some caveats at the very beginning of — or at the end of last year, you were talking about this year. How are you thinking about the markets based on how you were seeing them previously, and how are you thinking about them currently?

Chaim Siegel: So, thank you for having me. It’s always a pleasure.

I just want to backtrack, and I don’t think I’m doing something so fancy or anything. I think I’m just doing basic pro-trader look at the market, markets moving up, markets moving down, and keeping things simple based on a few simple data and facts that I constantly follow. And sometimes, I feel like the market gets swayed by the media or different news.

And I think that there’s a couple of building blocks. I’m just getting to your question, a couple of building blocks that can keep you sane in following the market and not get you crazy. One is fundamentals. Two is technicals. And maybe under technicals, or maybe its own category, I call action.

So, fundamentals, are earnings moving up? Is the economy doing well, right? That’s its own thing. Is the Fed getting in the way or not? Or is the Fed letting the economy go? That’s all called fundamentals, right?

And, fundamentals, I think, are good, right? The economy is good. The Fed is not getting in the way and therefore, earnings are good.

I was bearish on 2022. I flipped at the end of 2022 ahead of the big market run in 2023, getting bullish when I saw everybody was worried about recession, but I wasn’t, not that I’m a great prognosticator. I just like looking at the data and saying what’s going on now and I’m momentum oriented.

So, whatever is going on now, I believe that that can continue. I mean, I don’t think we have many better indicators than just assessing what’s going on now, and is it realistic, it could continue. So, I saw that jobs were very strong at the end of 2022. And I said everybody is bearish, jobs are fine. I’m bullish. And the market had a good year.

And coming into this year, I did see a couple of like geopolitics and maybe the Fed, mainly geopolitics as one of the big headwinds. Potentially, that could cause some bumps, but, I guess, as I saw that underlying fundamentals were good, the Fed wasn’t getting in the way of the market by not hiking and staying in they were really staying in a cutting stance even though they’re not cutting, they think they’re cutting, but they’re not cutting.

And so, the fundamental part is bullish. Technicals have been bullish. And action, which is basically measuring just how the stocks act, meaning are they volatile or not has been bullish.

I mean, stocks when they trade 0.5% or 1% every day up or down, that’s bullish. If it traded wild 3% or 5% up and down, that’s bearish. And that’s a hint for what the underlying trend is from traders and investors that are pushing the market. So, overall, things are bullish, and I think that the year can finish bullish. There’s other things I’m watching, but for now, it looks like it should continue to be bullish.

RS: What are some of the other things you’re watching?

CS: So, CPI just came out 0.3% yesterday. I think that’s a little bit of a perfect number for the market, because it keeps the Fed flatfooted. It means that there’s inflation, and it means that the Fed can’t hike.

So, inflation is not bad for the market. Inflation is only bad if it causes the Fed to hike a lot. Because if the Fed hikes a lot, then the market says, “Uh-oh, there’s going to be competition in the bond front or in the short-end market. I can get 5%, 6%, maybe more in the short end. Why do I need to invest in stocks and money comes out of stocks and goes into short-term instruments?

So, Fed hiking is negative for the market. But if the CPI is 0.3%, you have inflation, but the Fed still thinks that they’re going to cut, and they think that inflation is coming down. I think they’re wrong, right? I don’t think inflation is coming down, but we have 30 days to figure that out.

And in the meantime, me being momentum, I think whatever is the trend, unless you have something major that’s working against that trend, equal and opposite force like in physics, then the trend is the same thing. So, the CPI at 0.3% is fine, but I don’t think the CPI will stay at 0.3%.

The Fed is saying, “Oh, housing has to drop soon.” But the Fed is fighting inflation, and they just said that they’re going to slow down their quantitative tightening. Quantitative tightening means that, they are reducing their balance sheet from owning all sorts of fixed income securities. If they’re reducing their balance sheet, that means that they are going to buy less in the open – so to speak, the open market from the government.

So, the government has this huge buyer going away in the market. And when you have a huge buyer going away, that means that there will be price pressure in the market. So, bonds and notes and everything fixed income should have pressure.

And I look at (TLT) every day and for subscribers, and TLT has been going down. And quantitative tightening means that the big government manipulator of the fixed income market, the Fed is out of — is trying to get out of the market. Now, even though they’re fighting inflation, they said that we’re going to cut quantitative tightening, meaning we are going to buy more bonds in the market.

When this giant actor in the market, and I do think manipulator in the market, that’s what they’re designed for, comes in to buy more bonds because they want to reduce their portfolio less, so as bonds mature in their portfolio, they’ll — when they reduce quantitative tightening, that means they’ll be buying more maturing securities back, meaning they’ll be in the market more.

As they’re in the market more, they’ll support prices of all these fixed income securities. And when they support prices, that means the prices will go up. Interest rates across the yield curve generally would come down more than otherwise. And as they come down, it allows more growth. If it allows more growth, it allows inflation to keep going.

So, even though that the Fed says, “No, we’re focused on cutting inflation,” it really makes no sense to me that if you’re cutting inflation, why would you slow quantitative tightening. And so, the fact that they’re slowing it means that I think that they’re allowing inflation to percolate.

I think inflation is something that — obviously the word inflation means prices are going up, and prices going up can be good for Bitcoin prices and stock prices, and any prices in the supermarket, any prices, it means prices generally all go up together. So, that’s good for the market.

And so, that’s why 0.3% and inflation is good for the market, but when you start getting 0.4% or 0.5% or 0.6% CPI, then the Fed’s going to say, “Uh-oh, we’re losing our handle or our grip on inflation,” and they’re going to want to start hiking rates. And if they start hiking rates, it’s going to kill the market.

So, as long as we’re in this in between 0.3%, I think the market is fine, but if the CPI skips up to 0.5% and 0.6%, especially since the Fed and the market all believe that inflation is coming down and there’s going to be cuts, I think it’s going to be a big surprise for the market.

So, it takes time for the Fed to adjust. And I’ve been saying to the subscribers, they are pivoting to neutral, but they’re still talking cuts. And as long as you’re in an inflation period, which we are, and they’re still considering cuts, they have a few moves, which each move takes a few months before they get to the next pivot and the next pivot.

The next pivot would be to neutral, and then a pivot after that would be to hike, and then they’d actually hike. So, you see, like, you have six months of moves before the Fed actually does anything.

And so, if inflation is percolating because the Fed is pushing inflation because they’re being stimulative because they’re cutting quantitative tightening, then you could see six months out that they’re going to start to need to take — I believe inflation can start or continue to start — continue to move back up, and then that’ll force the Fed to cut, which will hit markets.

But in this in-between stage and the window — we have headlights in front of us before they actually change their stance and when they change their stance before they actually move on that changed stance, the market has a window of inflation, which is good for stock prices as it is for all prices.

RS: Very good. Chaim, appreciate the conversation as always. For those wanting more, check out Fed Trader on Seeking Alpha.