Cue the Hedge Fund Panic Music

We typically think of hedge funds being out there on the market’s cutting edge.

We think of elite traders, elaborate models, and maybe even an unfair advantage through superior hardware.

So a Moneyballer like yourself might be genuinely surprised to hear that many hedge funds are now in a state of panic — or at least concern — regarding a pivotal announcement from new Fed Chair Kevin Warsh.

The announcement? He’s taking steps to level the playing field between Main Street and Wall Street investors.

That’s great news for the long-term.

But in the short-term? Click below for the full story:

Video transcript:

Hello, fellow Moneyball economists. I’m Andrew Zatlin, and this is Moneyball Economics.

Well, the word for today, campers, is volatility.

I’ve been saying for some time now that we could expect volatility in the markets throughout the summer all the way up until the midterm elections. So hopefully you’ve heard my words and you’ve been able to take the right position so that you’re not just playing defense with your portfolios, you’re actually making money off this volatility.

And guess what? I think it’s going to be even more volatile than I expected because two more logs have been added to this fire. And the first is Elon Musk.

Elon Musk is committing $100 million to Republican midterm election campaigns. $100 million can buy a lot of eyeballs and can move votes one way or another. And this translates into market volatility because remember, the working view right now is that the Democrats are going to have a sweep of sorts that they could actually take not just the House or the Senate, but both.

That’s the working narrative today.

Now you throw a hundred million dollars and who knows how much more money at this?

Well, it could swing the other way.

And so as a result, it’s firmly up in the air who’s going to take Congress? And that makes hedge funds very nervous. They’re potentially being blindsided and they don’t know what to do.

And speaking about being blindsided, that’s exactly what Fed Chairman Warsh did to all these hedge funds out there. That’s the second log in the fire. Warsh is coming in and he’s totally changing the way the Fed is communicating to the markets.

In the past, there was a lot of communication, a lot of winks, a lot of head nods, a lot of interaction and dialogue so that hedge funds, well, they had their Fed whisperers in-house and those Fed whisperers could convincingly say, “Hey, my buddies back in the Fed are telling me this.” And there was great communication, so there were no surprises. And even better, the markets could kind of influence the Fed.

Warsh came out and he basically said, “I’m not showing you my cards. You’re crazy. From now on, there is no prior communication. From now on, you’ll know what the Fed decisions are when we tell you.”

So imagine you’re a hedge fund, you got to put your bets down. You don’t know what to do now. You can’t rely on the whispers and the head nods. That dials up the potential that you could be blindsided. You’re now a lot more nervous and you’re relying a lot more on the economic data that’s coming out.

And that’s the problem.

We have economic data coming out daily, weekly, monthly. Every single time a piece of data comes out, that could convince the Fed to do this or that. And as a result, you’ll have the hedge funds move positions one way or another.

Now coming into this week, what surprised me was that there was actually a probability of a rate hike of 30 to 40%. That’s what hedge funds thought.

That’s ludicrous.

If you’re a Moneyball subscriber, then you know that we’ve been saying there was no chance of a rate hike this time and likely not until we’re past November. You know our reasons why. You understand how we see the economic data absolutely not supporting a rate hike at this time and only maybe supporting one in the next few months.

As a result, with the 30-year yields going forward, we know there’s going to be a rate hike. We just don’t know what month. Well, so that makes an impact on the one year or the two-year kind of notes. It doesn’t impact the 30 years. So the 30 years went up when Warsh came out and said, “We’re not going to raise rates yet.” But the point is all these Fed experts are now kind of useless because the Fed is closing that dialogue.

Every day there’s a potential for a big swing as hedge funds try to position.

They thought there was a 30% chance of a rate hike. That’s ludicrous. What it does is it exposes all these hedge funds to the awareness that they don’t really know what’s going on.

And as a result, they’re going to be over-relying on this economic data. That gives us a little bit of an edge because we have a really strong finger on the pulse, not just of how to understand current economic data, but in the ability to sort of see what’s coming down the pipeline and predict accordingly.

So with that in mind, you want to be aware that there’s going to be a lot more volatility because there’s a lot less predictability in so many ways. Iran war is still going on, right? Take the right positions, make money off this situation because it’s not going to stop.

It’s going to be another hundred days of this. You better buckle up Buttercup. It’s going to be a bumpy ride. But we are in it to win it, folks.

Zatlin out.