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Beware of Hedge Fund Gurus Warning of Rising Rates

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Jesse Pound and Yun Li of CNBC report stocks close at record highs, market notches best month of the year despite Big Tech earnings misses:

The U.S. stock market set another round of record highs on Friday as Wall Street looked past disappointing results from major companies to wrap up its best month of the year.

The S&P 500 rose 0.19% to close at 4,605.38 and the Dow Jones Industrial Average added 89.08 points, or 0.25%, to finish at 35,819.56. The Nasdaq Composite rose 0.33% to close at 15,498.39. All three closed at record highs, and the S&P 500 and Nasdaq clinched their best months since November 2020.

The positive performance came despite weak third-quarter reports from two of the market’s biggest companies.

Amazon shares dropped 2.1% after the e-commerce giant badly missed earnings and revenue expectations for the third quarter. Apple stock fell 1.8% after the tech giant’s quarterly revenue fell short of expectations amid larger-than-expected supply constraints on iPhones, iPads and Macs. It was the first time Apple’s revenues have missed Wall Street estimates since May 2017.

However, Microsoft rose 2.2% to surpass Apple as largest listed company in the world by market cap. Nike and Intel also had solid days to boost the Dow.

Despite the disappointing results from Big Tech, the stock market has been raking in records amid solid earnings even with global supply chain concerns. About half of the S&P 500 have reported quarterly results and more than 80% of them beat earnings estimates from Wall Street analysts. S&P 500 companies are expected to grow profit by 38.6% year over year.

“So far, I think it is fair to say that companies have managed to navigate these headwinds effectively, of course having the benefit of strong demand,” said Angelo Kourkafas, an investment strategist at Edward Jones. “But they are not immune to it. These input cost pressures will show up as reduced revenue or potentially lower profit margins.”

“But I think so far, with about half to the S&P 500 companies having reported, the initial assessment is that profitability has remained fairly resilient because of strong demand and pricing power,” he added.

Shares of Exxon Mobil and Chevron rose on Friday after the energy giants topped earnings expectations. Starbucks, however, was under pressure after revenue from China missed expectations.

All three major averages posted their fourth positive week in a row and finished solidly higher for the month. The Nasdaq gained 7.2% for October, while the S&P 500 gained 6.9%. The Dow rose 5.8% for its best month since March. The month marked a rebound from September, where the major indexes declined.

Market sentiment was also helped by developments in Washington. On Thursday, President Joe Biden announced a framework for a $1.75 trillion social spending deal. The agreement, which is expected to make it easier to pass the separate infrastructure spending bill currently stalled on Capitol Hill, came in lighter on spending and taxes than earlier proposals.

Yung-Yu Ma, chief investment strategist at BMO Wealth Management, said the deal appeared to be in a “sweet spot” and should create more optimism among investors.

“The tax portion of it is looking like it’s going to come in probably below all of the original expectations. So the burden for specifically corporate taxes is going to be lower than the concerns and the expectations in the marketplace were,” Ma said.

Treasury Secretary Janet Yellen spoke to CNBC on Friday morning, saying she was hopeful that the administration’s infrastructure package would be approved soon while saying she does not believe it will add to the inflation problems the U.S. has been experiencing.

“It will boost the economy’s potential to grow, the economy’s supply potential, which tends to push inflation down, not up,” Yellen said during a live “Worldwide Exchange” interview.

Jeff Cox of CNBC also reports that Bill Ackman calls for the Fed to start raising interest rates ‘as soon as possible’:

Billionaire hedge fund manager Bill Ackman called Friday for the Federal Reserve to begin reining in the support it has provided for the U.S. economy during the coronavirus pandemic.

In separate tweets, the head of Pershing Square Holdings, with $13.1 billion under management, said the central bank should start turning off the monetary juice right away.

He teed up his position by saying he met last week with officials at the Fed’s New York branch, which houses the trading desk that carries out the wishes of officials regarding interest rates and the monthly asset purchase program.

“The bottom line: we think the Fed should taper immediately and begin raising rates as soon as possible,” he said.

“We are continuing to dance while the music is playing,” Ackman added, “and it is time to turn down the music and settle down.”

The statements come just a few days before the Federal Open Market Committee is set to begin its two-day policy meeting Tuesday.

For Ackman, insisting on the taper isn’t anything radical: Investors widely expect the FOMC on Wednesday to announce that it soon will start pulling back on its monthly asset purchase program in which the Fed is buying at least $120 billion of bonds. Markets are looking for monthly pullbacks of $10 billion in Treasurys and $5 billion in mortgage-backed securities, possibly starting in November and concluding in the summer of 2022.

Calling for interest rate hikes is another matter.

Fed officials have stressed that the initiation of tapering shouldn’t be construed as a path to rate hikes. The central bank has been holding its benchmark overnight borrowing rate near zero since the early days of the Covid-19 pandemic, and most FOMC officials have indicated that the first increase won’t come sooner than late 2022.

However, traders lately have been pricing in more aggressive moves, with futures contracts pointing to at least two quarter percentage point 2022 rate hikes, beginning in June, according to the CME’s FedWatch tool. There’s also just shy of a 50-50 chance of another increase coming in December. The recent anticipation of hikes comes with inflation running around a 30-year peak.

Ackman said he’s beginning to position his portfolio for higher rates.

“As we have previously disclosed, we have put our money where our mouth is in hedging our exposure to an upward move in rates, as we believe that a rise in rates could negatively impact our long-only equity portfolio,” he tweeted.

Pershing Square is up 15.7% gross in 2021 and 12.2% net of fees this year, lagging the S&P 500′s 22.5% return, according to company statements. That comes after a stellar 2020 during which the fund returned 70.2% on net. The firm has attracted about $1.3 billion of additional assets this year.

So, is Bill Ackman right? He's right that tapering isn't anything radical but his call on an upward move in rates is basically a call on inflation "stickiness" and I'm not so sure the market is pricing in rising rates.

Look at the yield on the 10-year Treasury note, it is hovering around 1.56% and I keep looking at this chart:

Notice that in December 2019, the yield topped out at 2% after reaching 3.2% in October 2018 and then the pandemic hit and rates hit a record low.

The reason I'm focused on the 2% level is because I see it as a possible level IF rates back up as inflation stickiness can persist, but I'm far from convinced we will see 2%, let alone 3% anytime soon.

All this to say take what hedge fund gurus publicly proclaim with a pinch of salt, we might look back at Ackman's rising rate call a year from now and say "boy, he was right on the money" or "boy, he was spectacularly wrong!".

Also, when it comes to rates and macro issues, I want to hear what Ray Dalio, Bob Prince, Stanley Druckenmiller think, I couldn't care less what Ackman thinks. 

I want guys and gals who live, breathe and eat macro on a daily basis. Ackman is a stock picker, that's his strength, not macro calls. Leave the macro calls for people who have a macro track record.

By the way, on macro, Jeffrey Snider of Alhambra Investments wrote an excellent comment today entitled "As Predictable Transitory ‘Inflation’, Predictably The Fed’s Taper Is":

In a very real sense, neither the current rate of PCE Deflator “inflation” nor any more expected to be added by the reported LABOR SHORTAGE!!! are what’s pushing the Federal Reserve toward its next taper error. The Fed doesn’t do money, so that’s not an option for them by which to set policy parameters.

All that’s left, then, is “expectations.”

Jay Powell was perfectly clear (and correct, for once) about consumer prices earlier this year. Transitory. All the data, including the latest PCE stuff today, shows this is going to be the case. The increasingly obvious bends in all the various indices, including the headline despite stubborn energy prices, are rounding nicely into shape (and this shape is, believe it or not, a familiar one, as I’ll get to later today).



Hearing all about supply bottlenecks and logistical nightmares, port snafus and shipping rates, Powell is attempting to connect dots that aren’t really connectable – or even real. What’s got him concerned is that if non-economic price factors like those keep up and then the unemployment rate’s low level really does kick in sometime soon, then all these factors might just blend together in the consciousness of consumers and businesses.

Yes, these people aspire to the Amazing Kreskin rather than Walter Bagehot.

In short, nearly the whole FOMC like central bankers around the rest of the world (see: Australia) are equally terrified of something for which there is absolutely no empirical evidence. Zilch. Nada. Yet, because they don’t do money, this remains at the very center of their worldview anyone even if solely a matter of faith and cultish ideology.

Expectations.

Powell’s taper is about consumers who can’t help but normalize to these various and unconnected price features because blended and added together they don’t appear like the same low (still unexplained) inflation of the previous decade. He wants to put the stop on it before these same consumers (as well as businesses) come to expect this is some new paradigm.

It has nothing to do with money, mind you, instead the FOMC’s job, as it sees itself, is to read your mind.

The fact that there is no sound basis behind this nonsense of expectations is what motivated the Federal Reserve Board’s Jeremy Rudd to write his recent scathing paper.



It all began with the Volcker Myth. Yes, myth. From Rudd:

Second, the fact that inflation’s stochastic trend manifests its last persistent level shift after the 1990–1991 recession also seems relevant, in that it suggests that ‘whatever happened’ to inflation might be more related to its actual level’s having been kept low rather than to any ‘credibility’ that the Fed gained as an inflation fighter following the Volcker disinflation.

I’ll translate in case you don’t speak econometrics: Economists hoped that “expectations” was a thing that could actually explain the real world they otherwise could not, and it seemed to be somewhat plausible until around, say, 2008 when it became increasingly and more obviously difficult to assign any value to the idea especially since it was all just made up in the first place. 

Essentially, we’ve been lulled into believing that ever since Volcker “conquered” the Great Inflation the central bank only has to manipulate emotions to achieve its aims. And we are told to believe that is emotions that only matter (circular logic).

Just how did the mythical, larger-than-life Volcker defeat inflation and set non-money monetary policy on this path? No one can actually explain it without resorting to this emotion-y hogwash (let me tell you, as I plan to do more, Volcker didn’t have a clue, either). Instead, you should be reminded of Stock and Watson’s far more honest assessment which seriously considered it could just as well have been “random good luck” as this other drivel.

Like Ben Bernanke’s ridiculous global savings glut, both that and random good luck are actually the same thing, the eurodollar system hiding from econometrics stuck purposefully outside their exceedingly limited economic/monetary worldview.

At least Mr. Rudd had the gumption to say the first part out loud, even if he left the important second part out of it. As I wrote last week in response to this shortfall:

Whatever you think of consumer price behavior in 2021, it has not been due to excessive money printing or any money whatsoever, yet it is totally understandable why an exceedingly large proportion of the public thinks this way anyway and more than a few have still acted (especially financially) on those thoughts.

It isn’t even what the Federal Reserve does, a fact of operation preceding Paul Volcker. They know it, have known it, and know better that you don’t. Expectation theory has never been anything more than a coverup, trying and failing to fill in these gigantic inflationary blanks left over from monetary evolutions which stretch even further back in time.

Further and actual empirical proof in 2021 is being provided by transitory “inflation.” The Treasury Department simply accomplished what QE never could or will. But even though Treasury’s massive influence at least produced a couple camel humps, it isn’t lasting, either.

Without the money (lack of money therefore holding back labor and income; see: Real Personal Income ex Xfers below) consumer prices have to be something else. That else was a combination of helicopters and a supply shock.


Jay Powell is worried that expectations won’t be able to reset before becoming “anchored” differently by this combination of issues that having nothing whatsoever to do with money – and that absurd, unscientific astrology is what’s behind their rush to taper the already irrelevance of QE6. And it’s the same which is driving the yield curve flat.

No wonder Jeremy Rudd was incited to include the otherwise obvious; “And in some cases, the illusion of control is arguably more likely to cause problems than an actual lack of control.”

In the case of 2021 becoming 2022, that’s the Fed attempting to chase dreams and fantasies of inflation it presumes has begun to enter the minds of the population while a very real and increasingly priced out repeatedly deflationary “growth scare” comes at the real economy yet again. It’s truly mind boggling how many times I’ve had to write essentially this same ridiculous paragraph. That, unlike what the Fed has, is evidence. 

I couldn't agree more with Snider. 

Just this week, I had so many people calling me asking me if I saw the news that rates are heading significantly higher.

"I'll believe it when I see it" I tell them and they look at me bewildered and perplexed. 

"Don't you watch the news?".

Yes I do but I filter everything using my BS detector and most of the time I just watch to get a feel of what the masses are thinking and feeling. 

There's a lot of nonsense in the news and people are understandably worried about inflation with the cost of everything going up but will this be a permanent shift?

Sure, it's stickier than most thought but for a secular shift in inflation to occur, you need a lot of things happening concurrently and unfortunately, I don't see this happening.

Quite the opposite, I remain far more worried about secular deflationary headwinds and think too many people are getting way too caught up in what is currently going on with supply bottlenecks, rising energy prices, etc. 

Let's see what happens a year from now.

In the meantime, don't fret about rising rates, they could rise a bit, strongly doubt they will rise a lot.

Also, as Jim Bianco of Bianco Research points out in this LinkedIn post, we need to pay attention to global yields as most remain negative and they definitely influence US bond yields:

With rates heading higher since early August, an update of the world of negative-yielding debt is in order. The charts and tables below show the total amount outstanding, maturity of that debt, OAS, total return, and much more.

Alright, let me wrap it up there on hedge fund gurus warning of rising rates.

In terms of markets, even though Amazon shares dropped today, Consumer Discretionary stocks posted strong gains this week while Financials languished (so much for rising rates):

And here are a couple of stocks that caught my attention this week:



I have tons more but I'm tired and want to grab some dinner and hit the sack early tonight.

Below, Oaktree Capital Management co-founder Howard Marks has a wide-ranging discussion with Bloomberg's Romaine Bostick. They spoke last Tuesday about global markets, monetary policy, distressed investing and crypto markets at the Milken Institute Global Conference in Beverly Hills, California. Great discussion, take the time to watch this, Howard Marks is exceptional.

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