* 66 trading days to go…
…until the Fed hikes rates on Sept 17th for the first time since 2006. Government bonds on course for 2nd worst annual performance in past 30 years, another symbol of 2015’s Twilight Zone as the era of excess liquidity comes to an end.
* 3 reasons why past Fed performance is no guide to future performance
Volatility in credit & equity markets should be owned: credit & equity bull markets have been ZIRP-led; U-turns have followed other central banks “exit from zero”; Fed rarely hikes from zero…last time they did in 1937 a recession and a 49% plunge in the Dow Jones quickly ensued.
* Using the classic Fed roadmap...
…on June 17th traders go long EM and US stocks, short gold, Euro & Yen. On Sept 17th traders go long commodities, and short US stocks, defensives sectors, EM bonds; as tightening progresses, investors allocate more to EAFE & EM equities, US tech & commodities, reduce exposure to Investment Grade bonds.
* It ain’t 1937…
…but we remain tactically cautious until Greece resolved, buy SPX calls, remain structurally bullish the US dollar, bullish stocks, bearish rates & opportunistic in EM, buy developed market banks, sell corporate bonds & reduce MBS exposure.
* My Big, Fat Greek Dreading (and other risks)
To the upside: concerns over Greece prove misplaced, investors over-hedge Fed risks, passage of TPP boost investor & corporate confidence, tech’s creative disruption = higher PE, lower CPI. To the downside: inflation surprises to upside.