If The Asteroid Ever Comes

“US stocks rise after GDP reinforces Powell’s dovish stance,” one headline read, on Thursday afternoon.

That was probably as plausible a narrative as any other. The July Fed statement was hawkish on Wednesday, but Powell’s caveat-laden press conference took the edge off.

The ad nauseam reiteration of the “ways to go” talking point wasn’t so much “dovish” as it was an effort to emphasize that his position hasn’t changed. There’s “some ground to cover.” We’re “some way away from having had substantial further progress.” And so on. In short, the Fed’s got nothin’ for you right now. Well, besides billions more in asset purchases, a standing repo facility and a plan to avoid hiking rates until your newborn is well on the way to her second birthday.

As for the data, the American consumer was… well, consuming in the second quarter. But the headline GDP miss and another 400k jobless claims print arguably help make the case for patience on the policy front. And you can spare me the scoffs. Relentlessly parsing every turn of phrase (indeed, every word) of Fedspeak and then contextualizing it via the incoming data, is part of the game. Indeed, there’s a sense in which it is the game. Read, for example, the following excerpt from Morgan Stanley’s Fed recap:

As data come in, and particularly labor market data, the FOMC will need to continually update their description of progress. The way it is framed now indicates to us that they aren’t ready to move soon, although they have made steps closer to the end-game. With further progress, so too should come further modification of the Fed’s language around that progress. We are expecting a further evolution of this language in September, which may represent the forward guidance we have been looking for. Our baseline expectation remains that this forward guidance will be a long heads-up before an official announcement in March 2022.

There’s something objectively absurd about a team of economists (in this case those at Morgan) sitting around debating when another team of economists (at the Fed) is likely to add an adjective or two in front of the word “progress.” But trillions in liquidity provision hangs on just that. And, because the timing of the first rate hike is contingent on the taper timeline, so too does the fate of short rates.

The self-referential character of the game traps everyone. The Fed is dovish because they understand the addiction liability they’re running with the market. The market keeps rising because it knows the Fed is dovish. The chart (below) is such a cliché that I’d rather never see it again. Anyone who uses it is probably out of ideas. Except for me. I’m not out of ideas, I’m just at the marina, on my laptop, with no Excel. So I’m forced to pull from my existing chart library.

The further risk assets rise, the bigger the addiction liability and thus the larger the potential consequences of tightening. In this scenario, any excuse not to tighten is welcome.

That’s how bad news becomes good news — as long as it’s not too bad. Then again, the worst public health crisis in a century morphed into one of the most spectacular rallies in history. The figure (below) is also a cliché. Sorry.

From that, I suppose we can infer that if the asteroid ever comes, whoever’s left 14 months later will be up 200% on their SPY.

Apropos, you can usually find a “Goldilocks” interpretation of the policy/data conjuncture if you’re determined enough. For example, robust consumer spending suggests the biggest part of the economy was just as strong as expected (actually more so) in the second quarter. But the headline GDP miss is plausible deniability for a Fed that wants to forestall tightening, as are elevated jobless claims.

Meanwhile, earnings season is going well and corporate profits just staged their swiftest rebound ever (figure below, from Morgan’s Mike Wilson). Amazon missed on the top line after the bell Thursday and the guidance was soft, but EPS of $15.12 very nearly matched the highest estimate.

If you ask Goldman, “the taper countdown [will] start with a first warning at the September FOMC meeting that leads up to a formal announcement at the December meeting.” The bank assigns a 20% probability of a formal announcement in November, a 55% probability for December, and a 25% probability that it comes in 2022.

We’re months away from the onset of the taper. And at least a year away from a rate hike, barring a scenario where inflation just refuses to play along. In the meantime, growth is solid, companies are making money again and equities are, in many respects, the only game in town.

If the question is “What could go wrong?” the answer is obviously “plenty.” But day in and day out, there seem to be more excuses to add equity exposure than there are to cut it. Much of that is by design, but that’s really the point isn’t it? The people who set the price of money and who control the world’s reserve currency want you to move out the risk curve and down the quality ladder. Not too far, mind you. They’d probably rather you weren’t colluding on message boards to push penny stocks into the stratosphere, for example. But if you want to keep buying every 1% dip on the benchmarks or “round up” your next Starbucks purchase into a fractional share of a high yield credit ETF, you can be sure that’s Fed-approved behavior. Who wants to fight that?

Speaking of “rounding up,” Robinhood’s debut was a disaster. In fact, as Bloomberg helpfully pointed out, the shares were “in the running to rank as the worst debut on record among US firms that raised as much cash as Robinhood or more.” The stock needed to close Thursday’s session at least at $34.90, the same article noted, “or else it [would] replace MF Global as the worst debut among qualifying firms.”

I’d say I feel bad for the company, but I don’t. Not even a little bit. On this, at least, I agree with Charlie Munger. If you’re bullish on the stock, don’t worry. Somebody called John Heagerty at Atlantic is with you. John gave Robinhood its first OW rating on Thursday before the shares started trading. Heagerty initiated HOOD (and I’m still chucking at the ticker) with a $65 price target. That implied 71% upside from the IPO price, and 10,000% upside from the afternoon lows. (The math on that latter joke is obviously fake. But the sarcastic derision is real.)

Circling back to the economy, BMO’s Ian Lyngen and Ben Jeffery delivered a great take on Thursday afternoon. Their capacity to essentially live-blog the market with no vacations (like me) is remarkable. “H1 growth now stands at +6.4% and to make it to the FOMC’s projection for 2021, H2 would need to come in at +7.4% or higher,” they wrote, following the advance read on Q2 GDP. “It’s worth reiterating that the recovery thus far this year has been boosted by two rounds of stimulus and an earlier rollout of the vaccination process,” they went on to say, adding that “as extended unemployment benefits comes to an end after Labor Day and the Delta variant further clouds the outlook, it appears increasingly likely that the peak growth and inflation figures are now in hand.”

Oh, and don’t forget: The federal ban on evictions expires on July 31.