Podcast Summary
In this podcast, David Cervantes, CEO and founder of Pinebrook Capital, discusses his perspective on the Federal Reserve’s soft landing scenario and the hiking cycle. He also shares his views on the Fed’s projections, the state of the housing market, and the importance of nominal GDP in determining economic conditions. David also delves into his trading strategies, particularly in the bond market, and his approach to analyzing the fiscal situation and liquidity flows.
Key Takeaways
Fed’s Soft Landing Scenario
- Definition and Status: David defines a soft landing for the Fed as a return to the Fed’s preferred PCE target of 2% year-over-year inflation for core PCE without causing a recession or significant job losses. He believes that the soft landing has already occurred, with inflation on the decline and a strong labor market.
- Rate Cuts: The Fed has not cut rates yet because they were looking to get ahead of the potential rapid disinflation and avoid a recession. The first rate cut is expected in September, but a high unemployment rate above 4.2% before August could trigger a cut in July.
Trading Strategies and Market Analysis
- Trading Bonds: David has been trading 10-year bonds and also using 2-year bonds as a proxy for the Fed’s actions. He trades outright using futures contracts because they offer leverage, liquidity, transparency, and are cost-effective.
- Nominal GDP Targeting: David supports nominal GDP targeting as it provides a practical and effective measure to determine how restrictive conditions are. He believes that focusing on the big picture and a few key indicators is more beneficial than getting lost in the details of numerous indicators.
Fiscal Situation and Liquidity Flows
- Approach to Analysis: David does not consider the fiscal situation or liquidity flows in his analysis, as he considers them to be tomorrow’s problems and difficult to trade in the short term. He focuses on understanding inflation and growth as his edge in trading.
- Equities Trading: David also trades equities, particularly S&P 500 futures, and approaches them in a similar way to fixed income, focusing on growth and inflation. He believes that as long as the business cycle is strong, a recession is not probable, and inflation looks stable or falling, it is a risk-on environment for equities.
Sentiment Analysis
- Bullish: David’s sentiment towards the bond market is bullish. He believes that the Fed’s soft landing has already occurred and expects a rate cut in the near future. He also sees potential in trading 10-year bonds and 2-year bonds as a proxy for the Fed’s actions.
- Neutral: On the fiscal situation and liquidity flows, David maintains a neutral stance. He acknowledges the fiscal situation as an issue but does not consider it in his short-term trading strategies. He focuses on understanding inflation and growth as his edge in trading.
- Bearish: There is no bearish sentiment expressed in the podcast.
