Forward Note - 2024/08/25
“Ladies and Gentleman, this is the co-main event of 2024! Sanctioned by the Security and Exchange Committee and its president Gary Gensler.
This championship bout is brought to you by Bloomberg, the Wall Street Journal, and The Financial Times.
And now!!
For those in attendance and financial markets fans all over the world, this is the moment you’ve all been waiting for! Live from the yearly symposium of Jackson Hole!!
Iiiittt’s tiiiiiiiiimmeee !!!
3 FOMC rounds for the undisputed title of best Fed Chairman of the 21st century, introducing first, fighting out of the blue corner, holding a professional record of 20 rate hikes for 5 cuts, Jay “data-dependent” Powell !! ”
If Bruce Buffer had commented on the action in the order book rather than in the octagon, that might have been what he said Friday at 8:58 a.m., as the financial world eagerly awaited Jay Powell to take the stage.
And to quote Powell during what was a lighthearted press conference, where he still delivered a few sharp jabs to the critics and expert commentaries he’s stoically endured over the past two years, “It’s time.”
This couldn’t have been better scripted. Everything now falls into place for the first rate cut of the year in September. The only real questions left on the table are the number of basis points and the terminal rate in December 2024 and, more intriguingly, in March/June 2025.
Yes, Jay Powell has successfully navigated a tortuous 24 months to deliver the long-awaited soft landing. Yet, the market's reaction was somewhat muted. Even though we ended the week on a positive note, with the S&P 500 adding 1.5% and the Nasdaq 1%, we failed to close at the highs on Friday and reach new all-time highs—a missed opportunity for the perfect fireworks display in anticipation of what comes next.
But what exactly comes next? In our eyes, something far more interesting than Jackson Hole, where a dovish Powell was somewhat anticipated, given the weaker inflation and job data we've seen over the past five weeks.
The real 500-pound gorilla, the ultimate heavyweight champion in every fund manager’s portfolio, is NVDA. Their earnings are expected Wednesday after hours, and needless to say, the reaction has the potential to disrupt this fastest rebound of all time significantly.
NVDA has gained more than 30% since the lows of August 5, when a tsunami of sell orders hit the US at the open on Monday morning. We strive to stay measured and rational in the face of market developments, but it's tough to remain neutral with this one. 30% in 20 days. Only BTC could match such a performance on its best days of 2024. Many market professionals would kill to deliver that over three years. Imagine what they would do to create 30% in 20 days.
If you need an example, let's talk about another Jerome—but this time, Kerviel—and how he lost €5 billion. Société Générale knew about it and was quite content with the insane risks he took when he was up €1 billion.
Another example is Nick Leeson, who brought down Barings Bank with unauthorized massive speculative positions on the Tokyo Stock Exchange, betting that the market wouldn’t move significantly overnight. Yes, Leeson was short volatility at a time when volatility was already elevated.
What could go wrong? Well, everything.
The rest is history: the Japanese market tanked the next day due to an earthquake, sending his positions into oblivion. The error account used to hide the losses had to be disclosed, and after four years in a Singaporean jail, he could finally return to his life.
We don’t have data to back this up, but how many Jerome Kerviels and Nick Leesons are out there right now, potentially taking enormous risks in NVDA while their management looks the other way because the trade has been printing so far? And what happens if NVDA doesn’t light up the marketplace with another stunning report and investors decide it’s time to take their profits?
Don’t be like Nick Leeson. It’s not worth gambling your life savings on whatever happens on Wednesday. The truth is, nobody knows except for a few “nobodies in the know.” And if you think you can trade in some distant market, think again. NVDA is so big right now that it could drag many seemingly unrelated markets with it.
So take this note as the final instruction before any fight begins—
“We’ve gone over the rules; protect yourself at all times. If you want to touch gloves, touch them now.”
In other news
We can’t blame Jay Powell for being data-dependent throughout his mandates. However, we can certainly question how this data has been reported to the marketplace. On Wednesday, we learned that the number of jobs created over the past twelve months was inflated by a staggering 800,000 jobs. That’s not a small error; we’re still puzzled about how it happened.
But instead of diving into conspiracy theories, let’s turn our attention to China. A year ago, they announced they would stop reporting data on youth unemployment—simply because it didn’t look great at the time.
And now, they’ve done it again. On Monday, China announced it would stop reporting the amount of foreign investment flowing into its stock market because the numbers were becoming embarrassingly low. It’s reasonable to draw a link between the lack of transparency in the country’s official data and the dip in foreign investment. One can also reasonably question whether money will magically return to these markets if fund managers, who are notoriously known for mimicking each other, no longer know who’s doing what.
Thank you for sticking with us until the end. As always, here are a few highlights from last week:
- are on fire—last week, we enjoyed their reminder on sheep herd mentality, and this week’s read is even better: the unexpected is more likely to happen than not because markets run on extremes. Markets have memories, and it wouldn’t hurt to remember that sometimes.
While Powell may have hinted at slightly easier financing conditions over the next few months, the Saudis and their Public Investment Fund are moving in the opposite direction. Known for deploying capital at scale in recent years, that trend seems to have reversed.
Thank you for your continued commitment to our newsletter. Your support means a lot to us. We wish you a great week and happy (and protected) trading!
Ksander
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