The Lessons Poker Can Teach You About Investing

Over the last couple of weeks, I have laid out the bull and bear case for the S&P 500 rising to 3300, and the case for the Fed to cut rates. In summary, the basic driver of the “bull market thesis” has essentially come down to Central Bank policy.

This reliance on the Fed has led to a marked rise in “complacency” by investors in recent weeks despite a burgeoning list of issues. As shown in the chart below, the ratio of the “volatility index” as compared to the S&P 500 index is near it’s lowest level on record going back to 1995.

Combine that with investors now completely back in the market, and you have the ingredients for a decent short-term correction in the weeks ahead.

In other words, investors are “all in” based on hopes the Fed will cut rates. However, rate cuts are unlikely to reverse the macro pressures facing the markets currently. Such as:

  • The global economy IS slowing.
  • Interest rates have turned lower with nearly 1/3 of Sovereign bonds now sporting negative yields.
  • China, representing 30% of global GDP growth, has slowed markedly.
  • Domestic GDP is expected to rise by only 1.50% in the second quarter, which is a sharp reversal from last year.
  • The trade war with China, and to a lesser degree Europe, has not been resolved and could accelerate on a Tweet.
  • Not surprisingly, ten years into an expansion, markets at record highs, unemployment near 50-year lows, and inflation is near the Fed’s target. Yet, the Fed is talking about cutting rates at the end of the month. What does the Fed know that we do not?
  • The potential for a hard Brexit is still prevalent.
  • Earnings expectations have fallen markedly along with actual earnings and revenues.