Greetings from Boca Raton.
I’m sitting this morning on the balcony of the beach club at the Boca Raton Hotel.
There’s luxury… and then there’s the Boca Raton. Wow… I just came over for a conference this morning, and now I want to make this the capital of the Florida Republic.
Well, almost…
Apparently, “they” decided this was a good morning to do construction on the beach-front properties. It sounds like a dentist’s drill piped through the PA in an NFL stadium. All while I sit here in awe of the prettiest beach views, easily rivaling sunsets in the Greek islands or the view from Malibu or Laguna Beach.
And I’m not just waxing poetic here – this is pretty much the exact situation we’re seeing in the United States’ economy right now; rosy economic news… but loud noise creeping in around the edges.
Here’s what’s really going on…
The Numbers Aren’t as Promising as They Say
Today, U.S. GDP came in at 2.4% for the quarter. This beat expectations. The economy and the consumer are resilient, even if we continue to be shocked by crumbling manufacturing numbers and weakness in the financial sector.
The “magic” of our economic growth is a seductive illusion; it’s easy to buy in. It’s not hard to create economic growth… when the U.S. government spends like a sailor. We’ve tripled our deficits in 12 months, and the combination of government infrastructure bills and never-ending stimulus are what create the conditions for “growth.”
My message to you is simple: This is not sustainable.
Here’s How the Wheels Come Off
The U.S. government is borrowing money to pay off interest on existing debt. How do you believe peak Keynesian economics will end?
For clues, we must look at the big injection of capital that hit the global economy in 2020. Markets screamed off the “COVID Crash” bottom in April 2020, with momentum turning positive. It stayed green for six straight months.
Right now, we’re still contending with the government’s bank bailouts in March, the resolution of the debt ceiling crisis, and spending hitting the system from the Inflation Reduction Act and other infrastructure priorities. A market that runs on a flood tide of liquidity, as opposed to earnings, can remain very resilient.
Yesterday’s reaction to another 25-point hike signals investors and passive funds don’t care about interest rate hikes and broader monetary policy.
They see that fiscal stimulus and massive deficit spending are driving this bus, all while global liquidity continues to expand. And guess what? There’s more even more capital ready to rush into the global system. This isn’t “Macro Bullshit.”
This is how the world and its markets work after 2010.
We’ll look for China to provide more quantitative easing in the next few weeks. Here’s the news:
China is likely to continue prioritizing domestic factors in its monetary policy as the new central bank governor takes office, treating solid economic growth as a buffer against any lingering uncertainties resulting from United States' monetary tightening, experts said on Wednesday. There may be further easing moves, including a potential cut in the reserve requirement ratio, in the next month at the earliest as the Chinese economy needs more stimulus to bolster demand and stabilize market expectations, they said.
It appears that short sellers are throwing in the towel. I can sit here, put my fingers in my ears, and scream into the sky about valuations and government spending and people like Pete Buttigieg (who I’m still convinced is a cartoon character).
Or I can just admit to myself… liquidity is what matters most.
If China’s going to ease, yeah, I’ll play the game with them.
I’m looking to sell a put spread right now on JD.com (JD), a Chinese e-commerce company that would benefit from more quantitative easing in China. This is a ticker that’s off big since Michael Burry loaded up on the stock. It looks like it’s found its bottom range. I’d rather sell puts on JD than try to buy calls. Why?
Because the probability of success is higher. And the purpose of a market is to sell.
Meanwhile, don’t short this market today as momentum remains green.
Stay positive,
Garrett Baldwin
Florida Republic Capital
