05-07-2020: The Fed/Congress Put

The Fed put is the general idea that the Federal Reserve is willing and able to adjust monetary policy in a way that is bullish for the stock market. That concept has been put on steroids in the current economic/viral pandemic. Not only is there a "Fed Put", but there is a "Trump/Congress/Treasury Put". Money (trillions upon trillions of dollars) is being pushed into the economy at almost all levels; the exception being most small businesses who have yet to see any of the tons of sugar being poured out by the government ("Uncle Sugar").


All this money is currently designed to just keep businesses alive until the viral pandemic is under control and people begin coming out of a 'shelter-in-place' mentality. Much of this money is in the form of loans or bonds that have to be paid back by the borrower. This means that as soon as people start socializing in person again (no idea when that will occur, by the way) and these businesses (particularly small businesses) start opening their doors, they will be saddled with a debt service that many businesses will not be able to handle even if the economy returns to pre-February 24 conditions. I will not be surprised to see bankruptcies surge and despite all the trillions of dollars thrown at the economy now, it will not be enough to keep us out of a deep recession; or worse... a depression.


I know, I have covered this topic in the past, but it behooves me to remind you that just because a vaccine is now in clinical trials, and even if the trials prove successful (very unlikely based on history) and a vaccine is available this summer for everyone... the economic pandemic will be far, far from over. This stock market is whistling past the graveyard by assuming a viral vaccine will be the same as an economic vaccine. While I do hope the market is right and that we are just a few months (weeks?) from seeing the economy on the road to recovery, but I am prepared for the next shoe to drop if the market comes to realize this economy has (probably) much further to go (years, maybe) before it is out of the woods.


But, having said all of the above and realizing that the stock market is never wrong... it went up a bit again today. As I said in this week's Client Letter, my plan was to stay in cash this week and I am sticking to that plan. If tomorrow's market is bullish and we go into the weekend on another short-term bull trend, AND if the market continues to look bullish come Monday, I'll stick just one bullish toe in the water next week.


In the meantime, we are diligently on my Delta-Neutral trading strategy. The algorithm is still being tweaked. Today's results from our all-in trades were less (not much, but less) than I expected. Frankly, I had hoped the trading components of the strategy would be nicely settled by now, but it looks like we need at least one more week of live trading with real money before I can either say, "go or no-go."


Oh... and there's the small issue that the Fed funds futures are showing negative interest rates in 2021... more on this in a future blog.