Remember what happened last time



Today we hear from the Federal Open Market Committee as Fed Chair Jerome Powell & Co announce the latest tweak to their monetary policy for the overnight Federal Funds interest rate.

I’m on CNBC at the closing bell every Wednesday for the last four or five years so I’m basically there every time this happens. I acutely understand the entirety of the soap opera in a way that almost no one else does – I’m backstage and in front of the curtain before and after the announcement. In the days leading up to each meeting, I will have read just about everything Wall Street’s economists have to say about their own expectations and outlooks. My guesses as to what will be announced are no better or worse than anyone else’s. I have opinions. Sometimes I nail it and sometimes I get it precisely backwards. So what. As my friend JC says about the opinions of others, I only trust dogs and the bond market. 

The more valuable information I have is the following:

The bond kings and chief strategists and interest rate traders are no better at guessing how the market will react to a given policy move or Fed statement than anyone else. You can trust me on this, I have seen it firsthand dozens and dozens of times. I know what they’re saying beforehand and then I hear what they say aloud afterward – the commentary is very helpful for context, but it’s just context, not clairvoyance. Everyone is guessing, some people are making more informed guesses than others, and even if you got the policy move right, you could not reliably predict the reaction of tens of millions of traders and trading algorithms around the world. No one has an eternal edge on the mass psychology of crowds. You’d be equally advantaged watching the Fed decision and its aftermath from the stool of a sports bar in the Back Bay as you would from a bond trading desk in Newport Beach.

I want to remind you all of what happened the last time the FOMC met so that you comport yourself appropriately today – both before and after the 2pm pronouncement.

At the May FOMC meeting, Wall Street was expecting the first 50 basis point rate hike since the year 2000 and that’s exactly what the Fed delivered. During the Q&A at Powell’s press conference, my friend Steve Liesman of CNBC asked about whether or not a larger hike – say, 75 basis points – might be on the table. Powell said no, not really. What followed immediately after that comment was a massive 900 point rally for the Dow Jones. The Nasdaq and S&P 500 also traded furiously higher as a combination of leadership bank stocks and the bedraggled tech sector names that had already been cut in half led the way higher. All sectors participated. And the word went out that it was the Fed passing on a larger hike that sparked the rally. Everyone went to sleep that night satisfied.

And then the next day the Dow Jones fell over one thousand points, giving all of the post-FOMC rally back and then some. It was a bloodbath that stood out amidst a year of similar bloodbaths. Just an absolute sentiment-killing crash that eventually led to the lowest lows of the year thus far. And why? How had sentiment turned so abruptly negative after the triumph of that Wednesday afternoon bull run? Wall Street had apparently decided that the Fed should not have taken a 75 basis point rate hike off of the table after all. No less than the illustrious David Tepper had called into Squawk Box that morning to say so.

In other words, what had been widely accepted as good news at 2:30pm on Wednesday turned out to have been terrible news after all. Plus 1,000 to minus 1,000 on the same exact headline, after a short period of reinterpretation by the crowd. Could you have predicted either side of this sentiment shift? Could you have foreseen both sides, occurring within 24 hours of each other, and repositioned an entire portfolio twice to have profited from each?

Of course you could not have. Nor could anyone else. Once again, I know everyone so you’re going to have to take my word for it.

And it is not until you’ve accepted and internalized the truth of what I am relaying to you here that you begin to understand a very important truth about the stock market: Anything can happen and nobody knows nothing.

Once you’ve accepted this, you immediately become a better investor than 99% of your peers. I’m not exaggerating. The hard part is not just accepting this, but reminding yourself of it all the time, every day if necessary. It’s worth doing – this reminder more than anything will keep you from following someone else off a cliff. It will keep you from adopting the sort of extreme positioning or rigidity of beliefs that are sure to destroy everything you have worked and saved for.

Let me wrap things in a bow so you can go on with the rest of what promises to be a beautiful midsummer’s day.

The FOMC will make its policy announcement today and then spend an hour or so guarding against saying too much to the reporters and limiting its own future flexibility. Stocks, bonds and possibly even oil prices will react, counteract and overreact for a few moments, in both directions, until a dominant trend takes hold – green or red – and then subsequent rounds of trades will serve to reinforce this dominant direction, pushing it toward an extreme into the close. Everyone will go home tonight either frustrated or satisfied. A narrative will grip the media and the chattering classes and we will all do our part to disseminate that narrative far and wide as our explanation for what just happened, why it happened and what it means for the future. We’ll do our best to understand whatever happens and our explanations will be mostly helpful. And then tomorrow’s a new day and some of the things that made sense on a Wednesday afternoon will hold true while other aspects of the day’s commentary will have become completely invalidated by the continued litigation and re-litigation of the marketplace.

Times passes, prices move and attitudes change along with them. Days go by. We’re now closer to the next FOMC decision than we are to the one just finished. The calendar advances. Our hair grows and we cut it. I remember reading that the average lifespan of a cell in our bodies is roughly seven years so that in seven years’ time we are entirely and completely a new person. Are you the same man or woman you were in the year 2014? Not one atom of your being from that time yet remains. You are new. Your old opinions need not survive into the present and outrun the actual molecules that made you up at the time of those pronouncements. Nobody holds anyone else accountable for what they once predicted because to do would risk having our own predictions dragged underneath the same karmic microscope. No thanks. 

And before you know it, it’s the next Federal Reserve meeting and the next. A pet dies. A child graduates this school or that one. A funeral. A little league home run. An ice cream cone. Stocks went down. They went up again. Your cells continue to die. You’re making more of them but less of them than once before. You are staring at a screen of blinking stock prices while sitting in a chair, that’s sitting in a house, that’s been built onto the surface of a fucking rock floating in space.

A little perspective.

Today the word has gone out that we ought to expect a move of 75 basis points in light of last week’s shockingly high CPI inflation report. The right reporters have been tipped off and the bond traders have quickly made their adjustments – thunder and lightning. We don’t know if a 75 basis point hike will happen for sure, but we can be reasonably confident based on the recent track record of the Fed’s signaling. This tells us nothing, however, about how the crowd may react when the news hits the tape.

Even if you had the Fed’s decision hand delivered to you this morning in an envelope, you still could not definitively know what to do with it. So maybe just watch and listen.

I’ll see you on TV later at approximately 4pm with Scott. We have Gundlach today too. Volume up.