Threading the Needle
Posted on Sunday, March 13th, 2022
Three of us went out to dinner this week. After an enjoyable meal we proceeded to head home. To get home we needed to enter a busy 4 lane highway. We got to the light just as it turned red. The cars in the 4 lanes running began to go. My son Chris began to yell –“Oh no! Oh no! Oh No!” It was then that I realized what was happening as I saw the white Siberian Husky just miss the last car. As she ran passed our car Diane immediately jumped out to help. I said to myself –“Well, I guess I’m going too.” The dog was about 30 yards away from me at this point and I was afraid it was going to run back into traffic. I held my hands up and said, “Come here!” The beautiful husky ran right up to me and threw herself down on the ground for scratches on her belly. I held the dog until the owner arrived from across the street. “Snowy” the Siberian Husky had thread the needle – dancing between cars across a 4 lane highway. I wouldn’t have believed it if I hadn’t seen it myself. As we pulled away I heard Chris say, “Why did Snowy cross the road?” It really helped cut the tension. He is so funny sometimes.
The Fed is meeting this week and they are trying to thread the needle. At their meeting they are expected to announce a 25 bps hike in interest rates. The markets expect this. The next movement of the market will be predicated on what Jerome Powell says in the press conference about how they will respond to rising inflation, struggling supply chains and an armed clash in Europe. The fight against inflation is a difficult conundrum. You would want to raise interest rates in the face of 7.5%+ inflation and $4+ a gallon gas prices. The problem is the economy is slowing and the yield curve is showing signs that it will invert as a recession is on the horizon. This is all complicated by the fact that our immense debt cannot stand higher interest rates. I hope that the Fed gets as lucky as Snowy.
The volatility in markets has been immense. The authorities at the London Metals Exchange even halted trading in sleepy old Nickel. It turns out that a Chinese billionaire is short Nickel (he sold short in a bet that it would go down) and is down about $8B on the trade. In this circumstance the bankers take control (usually) and make the customer sell the position. Only this time he is refusing to. This never happens. Think about it from his perspective. If he sells it he will probably end up dead from the Chinese government so why sell? It is never just one cockroach. If there is one on the verge of defaulting there will be more. The cracks are appearing and the economic system is starting to break. Commodities are an asset. They are money. Investors and banks own those assets and lend on them. What happens when someone refuses to or can’t pay? The system breaks. That is called counterparty risk and it tumbles like dominoes. The one essential factor in our worldwide financial system is TRUST. If you start claiming assets and levying sanctions you erode the basic underlying fundamental to the whole system. This wasn’t well thought through.
Traders and investors have been hedging their positions and taking down risk over the last few weeks. That makes sense in this environment. In sentiment surveys, for the third straight week, the bears outnumber the bulls. Positioning has been brought way down and everyone is waiting for the washout. That is exactly why the washout won’t come – yet. This is going to be an interesting week. We have the Fed making their announcement on Wednesday so investors will be waiting for that. On Friday we get Triple Witch which is the quarterly options expiration. That has been a marker of lows in the recent past. Dealers get to reset and that gives us the chance we come out of negative gamma.
The pain trade right now is higher and many will be forced to chase should it go. We will be looking to take off more risk if that is the case. There is a natural seller out there and it’s the Fed. Every time the market moves substantially higher it helps them by giving them cover to raise rates and restrict policy. There is a cap on this market.
Stay away from the news. It makes you want to find a bunker to hide in. Remember – the end of the world is a bad bet.
“Short term volatility is greatest at turning points and diminishes as a trend becomes established.”– George Soros
I think we aspire less to foresee the future and more to be a great contingency planner… you can respond very fast to what’s happening because you thought through all the possibilities, – Lloyd Blankfein
A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty. – Winston Churchill
To learn more about us and Blackthorn Asset Management LLC visit our website at www.BlackthornAsset.com .
Disclosure: This blog is informational and is not a recommendation to buy or sell anything. If you are thinking about investing consider the risk. Everyone’s financial situation is different. Consult your financial advisor.