The story of 2023 has been the stock market’s unwillingness to take Federal Reserve Chairman Jerome Powell at his word.
Since the start of the year, the S&P 500 is up about 8.1% (which is effectively the annualized return of the market since the 1930s).
Shares of absolute garbage stocks like Opendoor (OPEN) are up more than 100%, defying logic for anyone who might be new to the market.
My momentum indicator went green on January 6, a few days before the Treasury Department started pouring money into the system to address the ongoing debt ceiling crisis. This is a reminder that liquidity is the most important driver of the markets.
It doesn’t matter if the economy is on the verge of falling off a cliff. Investors will buy risky assets if enough new capital is pumped into the system. If you need a review of this, your Patient Zero was the run of Bitcoin from about $3,000 to $60,000 in 2020 after the Fed dropped $5 trillion out of the sky.
The Fed is fighting a losing battle right now. Congress has authorized a comical amount of money through the Inflation Reduction Act, the new infrastructure law, and the omnibus bill… and that money spills into the system.
But here’s where we have to start being skeptical. Today, the Federal Reserve started to go on the offensive.
And while everyone was focused on Jerome Powell’s speech, they missed the man who actually tells the truth about the central bank’s intentions.
Meet Mister Kashkari
Neel Kashkari is a former Goldman Sachs banker, who took a job at the U.S. Treasury Department at the worst time possible. Kashkari worked for Hank Paulsen in 2008, while the entire system was imploding.
Kashkari is now the President of the Minneapolis Federal Reserve Bank. It’s a pretty unassuming job, until you realize that he is really the voice of the Fed.
In March 2020, he went on “60 Minutes” to quell fears about the impact of COVID on the economy. He explained that the Fed can just create money out of thin air. And he explained that they can create A LOT OF IT.
After he spoke in late March 2020, the markets started to rebound.
That’s because the financial conditions of the nation started to expand a week later with monstrous levels of capital injections in the system.
From 2020 to 2021, the markets enjoyed all that sweet, sweet money.
But then, when inflation started to run hot, the Fed had to raise interest rates. And then, cut the balance sheet. The markets have been engaged in a battle between liquidity versus economic data since October.
Today, Jerome Powell spoke. The markets are not taking him seriously.
But Kashkari talked to Squawk Box on CNBC. And he delivered the knockout blow that this market needed to hear:
“We have a job to do. We know that raising rates can put a lid on inflation,” Kashkari said. “We need to raise rates aggressively to put a ceiling on inflation, then let monetary policy work its way through the economy.”
Kashkari said that the Fed funds rate will need to go to 5.4%.
The market is only pricing in 4.5% to 4.75%.
I hate to say this, but Kashkari has never lied in the time that I’ve followed him. It would be bizarre for him to start now.
So I expect that the Fed is going to raise to 5.25%, and when that happens, the music will stop.
One last thing. I follow insider buying as a very important signal for the market. CFO insider buying is extremely low. The people who know the balance sheet of their companies better than anyone are not touching their own stocks. If you look out six months, this is extremely bearish.
Stay liquid, and don’t chase bad companies. Instead, focus on great companies that will navigate this crisis and produce upside gains of 70% to 100% in the next two years. We can show you how to do that, here.
To your wealth,
Market Momentum is Green
Energy is down. Money is crowding into the FAANG stocks. Utilities are under stress. Real estate is stressed. This market is facing a reckoning, likely in the next five days. I’m largely in cash right now, but I’m cheering for this to get overbought. That will make the short potential even greater.