Thoughts on 25 vs 50 bp, oil, and BTC

I am sitting in an airport lounge on the way back from a trip to Mozambique, where I was attending a board meeting for Rainforest Trust. We visited our partner, Gorongosa Natural Park, where we are working to save 1.2m acres of forest. Gorongosa is the perfect example of what can be done when philanthropy, conservation, and a focus on human needs come together to protect nature and provide livelihoods and education. I am grateful that my career in trading gave me the means to give to Rainforest Trust and contribute to other causes that I care about. As much as I enjoy trading, it is still simply a means towards achieving my goals - living a life rich with opportunities to connect with people and nature, and being able to change the world for the better.

Having drinks by a lake at sundown, pointing at some rocks nearby wondering if they are crocodiles. Turns out they were crocodiles!

A single trade of mine can cost hundreds, sometimes thousands of dollars in commissions and spread, whereas to protect rainforest around the world, it can cost as little as several dollars per acre. The return on investment is a no brainer! If you love nature and have made a little money in trading, think about giving to Rainforest Trust.

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The market is currently divided on whether the Fed will cut 25 bp or 50 bp on Wednesday. My view is that they cut 50 bp.

The market started to lean towards a 50 bp cut over the weekend after an article by Nick “Nikileaks” Timiraos suggesting that the Fed is trying to nudge market expectations towards a 50 bp cut (they have used him in the past to deliver messages to the market during the one week Fed communications blackout window). Former Fed governor Bill Dudley also released an opinion article revealing his preference for a 50 bp cut. Despite no longer sitting on the Fed board, his vote still holds a lot of weight in the public.

Some may disagree, but I think the decision of whether to go 25 or 50 bp has monumental implications for the economy and how this cutting cycle will go. Employment is balanced on a knife’s edge - firms are no longer hiring, but they’re not firing either. With Fed funds implying a 68% probability that the Fed will ease by 50 vs 25 this week, a disappointment would trigger a weakening in the markets and sentiment and give way to fears that the Fed is behind the curve in addressing the downside risks to employment. Delivering a 50 bp cut would give the market confidence that the Fed will preemptively stave off economic weakness by being ahead of the curve.

Imagine if the Fed, in their first hike of 2022, delivered a front-loaded hike of 50 bp, instead of the paltry 25 bp. The large hike would have delivered a message to the market that they were serious about fighting the inflation that was rapidly rising, and it would have prevented them from having to resort to a series of 75 bp hikes later that year. We are seeing the mirror image today where the Fed has the opportunity to cut off the odds of a recession with a decisive 50 bp cut.

In addition, the Fed has a consistent track record of delivering the outcome that the market predicts - meaning that if Fed funds is predicting a probability of more than 50% of a 50 bp cut going into the meeting, then the odds of the Fed delivering that outcome are high. This is one of the reasons I feel strong conviction towards a 50 bp cut and am starting to position my portfolio for that outcome.

In the paid subscriber section, I’ll discuss the trades I’ve been putting on or would like to put on, my trading plan around the Fed meeting, and some final thoughts on how I think a 50 bp cut and the elections will affect BTC.