Friday Chart Book
Powell Stands Still / Equity Margin Debt / New Trade
Despite the parody around the Fed being under pressure to deliver steep rate cuts, Powell stood his ground, despite two of his gang dissenting and voting for a cut. It was a masterful press conference, where plenty of good questions were asked. Yet, it wasn’t him answering them confidently; it was more the case of him not knowing. You can’t blame him, although there seems to be a real fear within the FOMC chair of not getting inflation-expectations de-anchored and ultimately forcing the Fed to do the unthinkable: Hike rates again. Jay actually said that they are looking through tariff-induced inflation in an effort not to tighten monetary policy. We saw this film before.
Yes, housing is seeing weakness, yet, housing-related employment (see chart below) is not falling, which would be a good first indication of trouble ahead. This was produced before NFP.
Typically, a dissent resolves in cuts 3 months down the line. However, this cycle is so different that I wouldn’t want to bet my house on a similar outcome.
Observing it all from a distance, growth is slowing a bit, and labour market weakness is visible, although not worrying. Meanwhile, inflation is stubborn and possibly accelerating as tariff pass-throughs materialise. Financial conditions are super easy, and risk asset behaviour seems euphoric.
When looking at call option volumes (see below), we would indeed find ourselves in a re-leveraging cycle.
Meanwhile, the appetite for hedging downside seems muted.
Margin debt taken out to purchase equities has now surpassed 1 trillion USD or 3% of GDP. US equity capitalisation is just over 200% of US GDP.
This is just a reflection of the now, but doesn’t tell us much about the road ahead. Sure, things are possibly a bit too euphoric, and there is fragility building. This could take some time to unravel. With seasonally weaker months ahead, I am leaning towards caution. For the Paper Alfa Hedge Fund portfolio, I am considering downside (please note this was written before the latest downmove in equities). This week’s EUR/USD put has worked nicely. See details of the downside structure below.
Our buy-and-hold portfolio is up +14% YTD, and we just let it run untouched. The asset allocation model (PAAM) is long SPX and has no position in bonds currently (rebalancing weekly).
In addition, a reminder that you can now also use my models in TradingView scripts, which I made available for subscribers to use on their charts. This is not for free and incurs an additional cost. These are my momentum, reversal and intra-day models I am often referencing.
If you are interested, ping me an email with your TV username. Note that only paying subscribers will be granted access. No exceptions.
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Let’s now look at the mentioned trade idea, read some of Macro D’s latest thoughts on the Powell, Macklem and Ueda, before we go through all 250+ chart setups across Rates, FX, Commodities, Crypto, Stocks, and ETFs.
Enjoy a fantastic weekend!