Transcription
Let's imagine, uh, suppose you are driving a sports car at a speed of about 120 km/h on a winding mountain road at midnight, and suddenly the person next to you reaches out and turns off the headlights. Wow, that sounds very dangerous. Yes, that's right. The only thing left at that moment was the speedometer on the dashboard, dimly lit, allowing you to guess how fast the car was moving forward. Okay, let's break down this matter in our deep dive today. Because this is not just a scene from a thriller movie, but it is, uh, the environment of the global financial market at this very second. That's a very vivid comparison. Because the person who reached out to turn off the headlights of that car is none other than the US central bank, or the Fed, under the leadership of the new chairman, Kevin Watch. The main mission of today's deep dive discussion is to find out how we can survive and strategize to profit from this extreme volatility. The information we have laid out on the table now includes the minutes of the June 2026 FOMC meeting, analysis from Ingenz, and the latest interest rate forecasts. Yes, what we are facing is not just a normal economic cycle, but a complete change in the rules of the financial market. If we don't understand this new structure, trying to trade is like driving randomly in the dark, ready to fall off a cliff at any moment. Exactly. And this change in rules comes in the form of a complete U-turn. For many years, we have been spoiled and accustomed to what is called Forward Guidance, or providing advance signals. Uh-huh, yes. The Fed always used to whisper or hint whether the next meeting would raise or lower interest rates. But in the era of Chairman Powell, he has completely cut this off. Gone. The policy statements that used to be pages long have been shortened to a stub. And what shocked the market the most was that the Fed chairman himself refused to submit his personal interest rate forecasts in the dot plot document. For those of you who may not follow the Fed's documents closely, uh, the dot plot is a chart where each Fed official places a dot on the graph to implicitly vote on what they think the interest rate should be at the end of the year. It's like sending a signal to the market in advance, isn't it? Exactly. Now, the fact that the Fed chairman refuses to place his own dot is a declaration that I will not bind myself to any future whatsoever. The chain effect that follows is that the market is forced to rely 100% on the data at hand, or what is called Data Dependent. This has created a very frightening new phenomenon that many in the industry call the Golden Minute, right? I've seen this term in many reports. It sounds like a beautiful money-making period, but in reality, it's more like a killing minute. Haha, a killing minute? But it's true. And how does it work in a world where there are no headlights to guide the way anymore? Its mechanism is driven purely by panic and technology. Imagine the moment when important economic figures like CPI, which measures inflation, or employment figures like NFP are announced. In the past, the market didn't swing this much. Yes, in the past, if the numbers came out slightly higher or lower than expected, the market might only move a little because people believed the Fed had a plan to deal with it in advance. But now, that plan is gone. As soon as the numbers are announced at 8:30 AM US time, traders worldwide will scramble to grab that information. They will scramble to interpret and throw billions of dollars worth of buy and sell orders into the market within a fraction of a second. Exactly. Asset prices will surge and fall violently and suddenly because everyone has to quickly adjust their portfolios to the latest data on the car's dashboard. This is where it leads to a challenging hypothesis: is the Fed's choice to remain silent and not provide any clarity just a new working philosophy, or is it actually intentional? Intentional how? I think that by creating this volatility and fear, it forces investors to reduce their risk or de-leverage themselves. Financial institutions also find it harder to lend because the interest rate path is unclear. Is this a psychological tactic to tighten the financial system without the Fed having to exert effort by actually announcing an interest rate hike? Wow, that's very interesting. That idea has full economic weight behind it. Really? Yes, it's about bringing back what's called the Risk Premium into the market. If we look back at the past context, US inflation has exceeded the 2% target for five consecutive years. The Fed's credibility has been severely undermined. Making forward promises and then failing to deliver further damages its credit. Ah, so when Chairman Watch removes certainty, it becomes an excellent tool. Exactly. When investors don't know what the future holds, the cost of finance will naturally tighten through market mechanisms. The heat of speculation will decrease, which is exactly the environment the Fed wants to bring inflation down. That's a very deep reverse market psychology. But wait, even though the chairman is playing a game of poker, the other 18 Fed officials are still submitting dot plot reports. Yes, they are still submitting. And the numbers on this chart reflect a rare divergence. It's split exactly 50-50. Nine people look one way, and nine people look the other way. It's a picture that reflects the crossroads of the global economy right now. Let's look at the first side, the hawkish group, or the 9 hawks. This group believes it's necessary to raise interest rates at least once this year. And what's shocking and shook the market is that 6 out of these 9 people believe the next hike should be 50 basis points, or 0.5%, a full 5%. That's very aggressive in an environment where interest rates are already high. What are their reasons for such a hawkish outlook, when the economy doesn't seem as hot as before? Because they are looking deeper into the cost mechanisms that are building up. The key data is the PCE index for May, which is the inflation measure the Fed prioritizes most. This number bounced back up to 4.1% year-on-year. Wow, that's the highest since 2023. Yes. In addition, the hawks also see risks from imported cost factors, both in terms of import tax policies or tariffs, and geopolitical tensions. Ah, both the case of the Houthis attacking shipping routes in the Red Sea, causing shipping costs to skyrocket, and the tensions in the Middle East. Yes. These factors have pushed crude oil prices, both Brent and WTI, above $100 per barrel recently. Energy and transportation are the upstream of everything. When they become more expensive, the prices of consumer goods inevitably follow. And what about the other side? The dovish group, or the 9 doves, who say enough is enough, interest rates should be kept steady, or even lowered. Where do they get their confidence that inflation has been defeated, especially when the PCE numbers just spiked like that? The doves are referencing fresher data that reflects the current situation more quickly. That is the latest CPI and PPI figures for June. What happened is that CPI contracted by 0.4% and PPI contracted by 0.3% month-on-month. And negative figures like this haven't happened since 2020. Exactly. It's tangible evidence that inflationary pressures may have passed their peak. And importantly, rumors of a ceasefire in the Middle East have become more frequent, causing crude oil to quickly drop to $88. Ah, so the doves believe that if inflation is falling and oil is falling, then aggressively raising interest rates by another 0.5% could cause the economy to collapse and enter a recession. Yes, that's their stance. This is where the statistics in the document are astonishing. Due to the conflict between these two sets of data, market expectations have swung to extremes. The probability that the market priced in a Fed rate hike at the July meeting once rose to 34% when oil prices were high. Yes, but then with the news of the ceasefire... This probability figure dropped to just 7% within 5 days. Just 5 days. If oil prices and rumors have such a significant influence on monetary policy direction, aren't we trading based on geopolitics alone, rather than traditional macroeconomics? That's a very accurate observation. And the answer is yes. In the short to medium term, geopolitics is the real driver, because the transmission mechanism works in stages like this. How so? The Fed says it relies on data, right? The data the Fed cares most about now is inflation. But current inflation is driven by energy costs and supply chains. Uh-huh. And energy costs are determined precisely by international situations. Therefore, when the Fed ties its policy to monthly inflation figures, it implicitly ties itself to the volatility of oil prices and global news. This sounds like a formidable challenge for investors, as we cannot predict headlines in advance. How can we connect this information to actionable trading strategies? Let's go through it asset class by asset class. Let's start with the Forex market. What is the direction of the US dollar in this ambiguous Fed environment? For the US dollar, the overall direction remains in a state of what is called Bullish Consolidation. The main reason is the mechanism of interest rate differentials. How does this differential attract capital? Imagine global capital as iron, and bond yields as magnets. As long as the Fed committee has half of its members being hawkish, preventing interest rate cuts, the yield on US government bonds will remain higher than in other countries in Europe or Asia. Ah, so the US magnet still has a stronger pull, and investment capital continues to flow towards the dollar. Exactly. If that's the mechanism, then the strategy for Forex traders is to find opportunities when the dollar weakens slightly to buy in line with the major trend, right? What we call a Buy on Dips strategy. Exactly. Opening long positions or buying in currency pairs sensitive to interest rate differentials, such as USD/JPY, when prices pull back, or considering shorting EUR/USD, is a strategy with a structural advantage. Meaning, if we wait for the right opportunity, there's a higher chance of winning. Yes, because if the next CPI announcement shows figures higher than expected, even slightly, the market will immediately re-interpret that the hawkish Fed will win, and the dollar will be ready to break through resistance levels immediately. That makes a lot of sense. Now, let's move on to the most troublesome asset, the commodity market, especially oil prices, which swing wildly with daily news as we just discussed. How do we strategize trading oil without getting hurt? For oil, the iron rule in this era is: do not try to predict the long-term direction. Because the current price structure is completely driven by headlines. Be watchful. Just a rumor or a tweet about the situation in the Middle East can easily cause prices to swing up or down by $5-10 within a single day. Wow, such a strong swing. What strategy can handle that? The most suitable and safest strategy is to use Breakout Strategies combined with strict risk management. Please elaborate. This means we will not try to buy in advance or guess whether it will go up or down, but we will wait for the price to break through a clear support or resistance level to confirm that the market has chosen a direction, and then follow the trend, along with setting a stop-loss. Is that correct? Yes. The key is to strictly adhere to the stop-loss discipline. Never let a position run too far, because news can be denied or reversed overnight. We need to be quick and decisive. Yes. And if geopolitical factors continue to push oil prices to remain at high levels, it will become a domino effect, stimulating inflation again and causing expectations of higher interest rates to haunt the stock market again. Which is a bridge that leads us to the third asset class: the stock market and indices. Reports from Ingenz point to a phenomenon of Sector Divergence, or a clear split between industries. What is happening? Why are some stocks still hitting new highs with a straight face, even though the market knows that interest rates are still high and may remain so for a long time? Uh, if we connect this to the big picture of economic mechanisms, high interest rates create significant pressure on cyclically sensitive stocks or companies that rely on borrowing to expand their operations. And these companies are usually concentrated in broad market indices like the Dow Jones or the US30 index, right? Correct. But at the same time, large technology stocks in the NASDAQ 100 index, or if traded through ETFs, QQQ, have a strong protective moat: massive cash flow and the booming demand for AI, which makes them more resilient to high interest rates. Ah, so with the AI trend being clear and generating huge revenues, investors are willing to overlook the cost of finance, right? But wait, these tech stocks have already risen significantly. Do they have no weaknesses? They definitely do, and they are dangerous weaknesses. The mechanism we need to understand is that technology stocks are often valued using the discounted cash flow method. How does this method work? It means that the value of a company today is assessed based on the massive profits expected to occur in the future, 5 or 10 years from now. Now, imagine if inflation were to surge beyond expectations, forcing the Fed to sharply raise interest rates. Bond yields would skyrocket. This would be far more valuable than the cash that will be received in 5 years. Exactly. The future value of these tech stocks will be heavily discounted or subtracted. This is where indices like QQQ become vulnerable. I see. So, the strategy for the stock market depends on inflation assumptions. If inflation figures come out frighteningly high, the sensible strategy is to consider opening short positions on the index to hedge the main portfolio. Yes, that's a good hedge. But conversely, if the economy continues to expand well and inflation stabilizes, waiting for an opportunity to buy tech stocks when prices pull back, or buy the dip, is still a plan with a high chance of success in the medium to long term, right? Correct. Understanding these mechanisms helps us not to panic with every swing. And another point that Ingenz's report highlights is the choice between bank stocks and the bond market, or money market funds. In this high-interest-rate environment, shouldn't bank stocks have an advantage? There's some truth to that. Large bank stocks like JPM or BAC may profit well from the net interest margin, but you also have to bear the risk of rising non-performing loans if the overall economy slows down. And if we are investors who don't want to take on the risk of bank non-performing loans, wouldn't it be safer and more comfortable to park cash in money market funds like VMFX, which offer returns linked to Fed rates? Money market funds offer excellent safety and liquidity, but their mechanism has a weakness called reinvestment risk. What does that mean? It means that the return you get today is high because Fed rates are high. But as soon as the Fed decides to lower interest rates, the returns from these funds will immediately drop. Ah, so it doesn't lock in the rate for us permanently. Yes. Therefore, if you analyze the overall picture and believe that eventually, in the long run, interest rates will decline, then considering buying high-quality corporate bonds to lock in a 5-6% long-term yield from now on might be a more strategic option than just leaving cash in money market funds. Ultimately, all of this comes back to strictly managing position size. This era is not one for going all-in on a single bet. And what does all of this mean for us who follow market movements? The clearest conclusion is that the new Fed structure under the Powell era requires highly flexible investors. You must make decisions supported by the data at hand, and abandon old beliefs of waiting for the central bank to provide advance signals. I strongly agree. That era is over. Having discipline in setting stop-losses and a deep understanding of why each asset class responds differently are the only defenses we have to deal with every Golden Minute that can swing our portfolio drastically into the positive or negative. Yes, and to build on that idea, throughout our deep dive, we have assumed that the market and the Fed are both responding to economic data on a month-to-month basis because no one is willing to look far into the future. Yes, relying purely on monthly data. But this is the most important question: what will happen if the economic data they are using to make decisions turns out to be flawed? Uh, flawed? Consider if employment or inflation figures are announced in one way, causing massive volatility, but then three months later, government agencies revise and significantly adjust those figures, which, frankly, has happened quite often recently. Oh my. If that's the mechanism, it takes us back to the image of driving at night from the beginning. Not having headlights is bad enough, but if the Fed and the market are accelerating based on flawed data, it's like the speedometer on the dashboard is broken and also showing an inaccurate speed. Exactly. The market and the central bank might be chasing shadows of data that don't reflect the real economy. If the speedometer malfunctions, the volatility we see today might just be a taste of what's to come. This is an issue that truly needs to be considered and watched carefully. For today, our deep dive must conclude here. Thank you for joining me on this journey into the darkness. See you again in the next deep dive.