These Huge Market Distortions Indicate Vulnerabilities (and Opportunities)

In this article:

• The problem with inflation and the Fed's balance sheet
• Worrying divergences in US stocks indicating a bubble?
• Similarities to my famous New Zealand dollar trade
• Potential trade opportunities and their triggers

Thoughts on the Market - February 5, 2024

In my last write-up, I discussed how this past week was going to be full of important economic data and associated market risks. In fact, the numbers didn’t disappoint, as we had a week of outlier data, with the nonfarm payroll data being particularly shocking. The idea of a March interest rate cut by the Federal Reserve Board has been largely crushed by surging employment growth and much higher than expected hourly wage data. Powell has effectively confirmed that a rate cut at this time seems quite premature.

I have maintained for a long time that inflation would prove to be stickier than we would like, so I wasn’t particularly surprised by the much higher hourly earnings. The initial surge in inflation a few years ago was a natural by-product of supply chain shocks, huge government deficit spending, and the Fed going wild with monetary easing.