“The Whites Of Their Eyes”

By Peter Tchir of Academy Securities

The Whites of Their Eyes

“Don’t Fire Until You See the Whites of Their Eyes” was allegedly the command given to soldiers at the Battle of Bunker Hill. The original intent of the order was to ensure that ammunition wasn’t wasted when the shots were unlikely to be effective.

That has changed over time to mean “don’t act too early.”

But maybe we need to go back to the original order and think about the soldiers (nervous, even scared, facing an enemy likely already firing at them) and imagine how difficult it was to stand their ground and hold their fire until the right moment.

At Academy, many of my colleagues have faced enemy fire. I think that universally they will tell you how difficult it is. Even with intense training, team building, leadership, and so many other things designed to prepare them for that moment, it is still a difficult test.

Which brings me to the Fed.

The Fed has had a consistent message since Powell’s Jackson Hole speech. The Fed doesn’t care about recession and they might even welcome one. They don’t care about job losses, and in fact, they are targeting job losses. They say that they will do anything to fight inflation and that they need to do more, despite:

Evidence that rising rates are slowing major purchases and the economy.

COVID related supply chain issues and fiscal stimulus created much of the inflation (which had very little to do with monetary policy).

Saying that it was transitory for a year or more and now acting as though it is permanent.

Anchoring inflation expectations both in surveys and market-based measures.

Ignoring their own models that acknowledge prior actions take time to show up in the data.

A dangerous geopolitical landscape with North Korea reminding us to pay attention to them and Iran busily working on their nuclear options (in addition to issues with Russia and China).

Evidence that QE and QT distort prices more than other traditional tools and unwinding them may be more impactful than thought.

Will the Fed wait until they see the proverbial whites of their eyes, or will they blink first?

If your legacy was Mr. Inflation or Mr. Recession, which would you go for?

We know that the Fed has presented a unified front with the inflation fighting mantra, but does everyone really want to go down with the ship if it is sinking?

Bottom Line

Expect weaker data, including jobs.

The Fed might try to stick to the hawkish rhetoric, but I expect some cracks in the messaging. The bad news is good trade is not over yet, but it needs Fed corroboration, which I expect to happen in the coming days. There will be some “sticking to the inflation fight” mantra, but just enough words will be used to keep this rally alive.

My view remains that this will morph into “bad news is bad” after that because we’ve already started rolling the rock down the hill and have been pushing when we already should have been pulling it back.