DANGEROUS FIXATION - Today I thought I would spend some more time going into the story of the next Fed Chair appointment and why I think the market is walking down a dangerous path here. My concern is that investors are setting themselves up for disappointment on this expectation the appointment of Jerome Powell as the next Fed Chair will generate a sustainable rally in risk assets. There's a very real danger associated with what has become a fixation on 'one dimensional role designation.' People will say, he's hawkish, he's dovish, she's dovish and so on. But the truth is, central bankers should be neither inherently hawkish or dovish. The Fed's responsibility is to ensure it works in the best way possible to achieve its goals of maximum employment and price stability. This means central bankers should adapt and adjust based on what the economy needs.
NO ROOM FOR IT - And it is my strong opinion that considering where we're at in the monetary policy cycle, there's very little, if any room for dovish central banking into 2018, much in the same way there was very little, if any room for hawkish central banking back in 2008, at the onset of the financial markets crisis. I believe we've reached the point where dovish leanings will no longer pair well with effective monetary policy, given an economic outlook contending with the very nasty combination of full employment, financial stability risk from an absurdly disconnected stock market, and the threat of rising inflation. I'd also add that the prospect of Powell as the next Fed Chair is one that has been priced in and played out ad nauseam. This alone leaves risk assets vulnerable and exposed to a sell the fact reaction, albeit after what is likely to be an initial wave of euphoria.
JUST LIKE THIS - The way I see this playing out is kind of like what we saw when the market was initially reacting to the possibility of Trump as President. If you recall, we saw a big dump in stocks in the immediate aftermath of the election win, as the market had believed a Trump victory to be intensely risk negative. But the market was wrong there and I think it will be just as wrong here, when it assumes that confirmation of Powell will be an event that puts a stamp on another 15-20 run in stocks from the current record print. As far as strategy goes into Tuesday, I will continue to keep you posted with any updates. The calendar is very active this week and I expect we will be doing some more trading.