A Manhattan court heard a case in 1994 to rule whether three card monte was a game of skill or a game of chance; the judge ruled that three card monte was a game of skill, and the defendant was not guilty of illegal gambling, explains Kelley Wright, value investor and editor of Investment Quality Trends.
Here’s the deal, pardon the pun, but three card monte is not a game of chance, or a game of skill. Whether the game is played with playing cards, shells, or any other medium, three card monte is nothing but a common scam.
As you are no doubt hoping, there is a point in the vignette above. Call it what you will, but the Fed is playing its own version of the shell game. Over the last few weeks several Fed governors have used speaking appearances to hammer the hawkish points that the Fed still has work to do, that the terminal rate is higher than the market is projecting, and that rates will stay higher longer than the conventional wisdom presumes.
So, what does Powell do in his recent speech to the Brookings Institution? Goes all dovish by saying that smaller interest rate increases are likely ahead even as he sees progress in the fight against inflation as largely inadequate.
Excuse me, but what in the heck are you doing? The highest inflation in fifty years and the quickest Fed Fund increases ever, and the market was already pricing in smaller increases in December and rate cuts in the latter part of 2023.
To Powell’s credit though he did admit that short-term data can be deceptive, and he needs to see more consistent evidence. “It will take substantially more evidence to give comfort that inflation is actually declining.” “By any standard, inflation remains much too high.” “I will simply say that we have more ground to cover.”
There it is, the money card, and the market lost sight of it in the shuffle. “Substantially more evidence,” in my opinion based on my experience, is that the rate increases so far, and the rate increases to come, have not fully expressed the damage and havoc they will wreak on the economy, and subsequently the market. This is to say I don’t think the low has been put in yet, and won’t be until sometime next year.
Do a little research, and you will find many, many instances of the market getting ahead of its skis, particularly in a recessionary environment, where it puts on fast and furious rallies only to see them fail over and over. Until the market stops anticipating the Fed bailing it out and the thought of owning stocks becomes distasteful, will there be an actual bottom.
This is to say we aren’t even in the vicinity of backing up the truck. Rather, I would be looking for Overvalued positions to discard. For those with enough capital gains in taxable accounts to hurt, it might also be a good time to jettison some losses to wash against the gains. Not to worry if you really like the companies you sell, in 31 days you can buy them back and establish a new basis. Lastly, the only way to win at three card monte? Don’t play.