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Fed trader Chaim Siegel discusses fundamental and technical upside (0:35). Ideal CPI numbers, Fed rate hikes, anti-inflation and bonds (4:00). This is a brief conversation from a recent podcast by investment experts.
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Rina Scherbel: Chaim Siegel, listeners know you, you run Fed Trader. Often, you are here talking about macro topics.
You were talking about how you would be optimistic with some caveats at the beginning of — or at the end of last year, you were talking about this year. How do you think about the markets based on how you saw them previously, and how you think about them now?
Chaim Siegel: So, thank you for having me. It’s always a pleasure.
I just want to step back, and I don’t think I’m doing anything fancy or anything like that. I guess I’m just taking a basic pro-trader look at the market, markets are moving up, markets are moving down, and keeping things simple based on some simple data and facts that I keep track of. Sometimes, I feel that the market is affected by different media or news.
I think there are a few building blocks. You just got to your question, some basic elements that can keep you sane in following the market and not drive you crazy. One is the basics. Two is techniques. And maybe under a technical category, or maybe a category of its own, I call the procedure.
So, the basics, are earnings rising? The economy is in good shape, right? That’s its own thing. Is the Fed standing in the way or not? Or is the Fed leaving the economy? This is all called basics, right?
I think the basics are good, right? The economy is good. The Fed doesn’t get in the way so profits are good.
I was pessimistic about 2022. I flipped at the end of 2022 before the big market took off in 2023, and I became optimistic when I saw that everyone was worried about a recession, but I wasn’t, not because I’m a great forecaster. I just like to look at the data and say what’s happening now and I’m interested in momentum.
So, whatever happens now, I think it 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, and can it continue. So, I saw that jobs were very strong at the end of 2022. I said everyone is pessimistic, jobs are good. I am optimistic. The market had a good year.
And by this year, you saw some similar geopolitics and perhaps the Fed, especially geopolitics as one of the big headwinds. It’s probably going to cause some bumps, but I think, since I saw that the underlying fundamentals were good, the Fed wasn’t holding the market back by not raising rates and staying there, it was actually staying in a cutting position regardless. . They don’t cut, they think they cut, but they don’t.
Therefore, the fundamental part is bullish. Technicians have been bullish. The movement, which basically measures how stocks are behaving, meaning whether they are volatile or not, has been bullish.
I mean, when a stock trades 0.5% or 1% every day up or down, that’s bullish. If it trades wildly 3% or 5% up and down, it is bearish. This is a hint as to what the underlying trend of traders and investors is driving the market. So, overall, things are bullish, and I think the year could end higher. There are other things I’m watching, but right now, it looks like it should continue to trend upward.
rupee: What are some other things you watch?
CS: So, the CPI rose 0.3% yesterday. I think this is a fairly ideal number for the market, because it keeps the Fed steady. This means there is inflation, and it means the Fed cannot raise interest rates.
So inflation is not bad for the market. Inflation isn’t bad unless it causes the Fed to raise interest rates a lot. Because if the Fed raises too much, the market says, “Oh, there’s going to be competition on the bond front or in the short-term market. I can get 5%, 6%, maybe more on the short end.” Why do I need to invest in stocks when the money is leaving stocks and going into short-term instruments?
So, the Fed raising interest rates is negative for the market. But if the CPI is 0.3%, that means you have inflation, but the Fed still thinks they’re going to lower inflation, and they think inflation is going down. I think they’re wrong, don’t you? I don’t think inflation is heading down, but we have 30 days to find out.
Meanwhile, being momentum, I think that whatever the trend is, unless you have something major working against the trend, an equal and opposite force as in physics, the trend is the same thing. So, CPI at 0.3% is good, but I don’t think CPI will stay at 0.3%.
The Fed says: “Oh, housing should go down soon.” But the Fed is fighting inflation, and they just said they will slow down their quantitative tightening. Quantitative tightening means that they are reducing their balance sheet from holding all types of fixed income securities. If they reduce their balance sheet, it means that they will buy less on the open market – so to speak, the open market from the government.
Therefore, the government kept this huge buyer out of the market. When a huge buyer leaves, it means there will be pressure on prices in the market. So, bonds, securities, everything related to fixed income should come under pressure.
I look at TLT every day and for subscribers, TLT has been declining. Quantitative tightening means that the big government manipulator of the fixed income market, the Fed, is out — trying to get out of the market. Now, even though they are fighting inflation, they said we will reduce quantitative tightening, which means we will buy more bonds in the market.
When this giant actor comes into the market, and I think the market manipulator, that’s what they’re designed to do, to buy more bonds because they want to reduce their portfolio less, so when the bonds in their portfolio mature, they’ll — when they reduce quantitative tightening, that’s It means they will buy more mature securities, which means they will be present in the market more.
Since they are in the market more, they will support the prices of all these fixed income securities. When they support prices, it means that prices will rise. Interest rates across the yield curve will generally fall more than otherwise. As it descends, it allows for more growth. If more growth is allowed, inflation is allowed to continue.
So, even though the Fed says, “No, we’re focused on getting inflation down,” it doesn’t really make sense to me that if you’re getting inflation down, why slow down quantitative tightening. Therefore, the fact that they are slowing down means that I think they are allowing inflation to seep out.
I think inflation is something – obviously the word inflation means that prices go up, and rising prices can be good for Bitcoin prices, stock prices, any supermarket prices, any prices, meaning prices generally go up together. So, this is good for the market.
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% for the CPI, the Fed will say, “Oh, we’re losing our handle or our ability to handle inflation.” Control inflation,” and they’ll want to start raising interest rates. And if they start raising rates, they’ll kill the market.
So, as long as we’re in that range between 0.3%, I think the market is fine, but if the CPI goes above 0.5% and 0.6%, especially since the Fed and the market all think inflation is coming down, there’s going to be Discounts, I think it will be a big surprise to the market.
So, it takes some time for the Fed to adjust. I’ve been telling subscribers that they’re turning neutral, but they’re still talking about the discounts. And as long as you’re in a period of inflation, as we are now, and they’re still thinking about cuts, they have some moves, each step taking a few months before they get to the next pivot and the next pivot.
The next pivot will be neutral, then the next pivot will be rally, and then they will actually go higher. So, as you can see, you have six months of action before the Fed actually does anything.
And so, if inflation is trickling down because the Fed is pushing inflation because they’re stimulating because they’re reducing quantitative tightening, you can see after six months that they’ll start to take — I think inflation could start or continue to start — keep moving again, and after This will force the Fed to cut, which will hit the markets.
But in this in-between phase and window – we have the headlights in front of us before they actually change their position and when they change their position before they actually move on that changing position, the market has a window of inflation, which is good for stock prices as it is for all prices.
rupee: very good. Chaim, appreciate the conversation as always. For those who want more, check out Fed Trader on Seeking Alpha.
