In short, buy TLT calls. In long...
# Introduction
Fellow regards, I’m sure we are all aware that the all Powell-ful Jerome will be determining, at the Fed meeting today, how hard a fucking our significant other’s boyfriend will be pumping out. Yet fewer have discussed what move they will be making based on this situation. My thesis is simple - the market has mispriced the chance of a rate cut, underestimating it, and so to take advantage of that, I have am in a long TLT position - a highly-leveragable, long-term government bond ETF. I’ll first explain why I think there’s a higher chance of a rate slash than the market is telling us, specifically diving into why the market has been mispriced. I’ll then move onto why this will cause TLT to rise, and also why I’ve chosen TLT over other related assets.
# Why an interest rate cut seems likely to me
Let’s start with some basic economics. Modern monetary theory suggests that the FED uses interest rate hikes to lower inflation at the cost of weakening the economy (raising unemployment), while cuts strengthen the economy while causing inflation. Here's how our situation looks to me:
First, consider inflation. To be completely honest, I have been working on this thesis since before the release of CPI data for February - personally, I expected annual inflation, from January to February, to fall from 3% to 2.9%. So, I waited until March 10th for a bit of confirmation bias. I was greeted by:
[Fig 1.1. CPI for February 2025, all goods](https://preview.redd.it/hr2m6snl1npe1.png?width=1766&format=png&auto=webp&s=30e0d3b370fff5664846a1fc00fcf019370518e0)
[Fig 1.2. 12-month inflation of February 2025, all goods](https://preview.redd.it/58duajjt1npe1.png?width=2464&format=png&auto=webp&s=7504887c1cdb54bb6655364ac732cd031b5fb310)
Inflation has retreated more than expected, falling to 2.8%. One of the many reasons why an interest rate cut initially seemed unlikely was due to concerns of sticky inflation - this has provided evidence that inflation is falling. Granted, fed changes are not instant, and I’ll address fears regarding inflation later on in more detail. However, this data has shown us that inflation isn't as bad as we thought it'd be, and seems to be falling - evidence in favour of a rate cut happening.
On the other hand, the economy:
[Fig 2.1. Consumer sentiment data](https://preview.redd.it/j9khkay22npe1.png?width=1216&format=png&auto=webp&s=3844b51954a3e6f01801e10ba3334e014d3d6713)
Consumer sentiment has completely crashed, falling 10% from Febuary to March, with expectations showing an even bleaker result
[Fig 2.2. Consumer spending falls in January 2025](https://preview.redd.it/dp7hgvg82npe1.png?width=1222&format=png&auto=webp&s=abc1d6630a4380931629607fe431db721b62a781)
Actual spending has also fallen - for the first time in a long time, people are spending less, despite easing inflation. And while preliminary data has appeared for February showing consumer spending has gone back up by 0.2%, this is still underperforming expectations. A weak consumer base, unwilling to spend, is never a good sign.
[Fig 2.3. ISM Manufacturing - PMI Index](https://preview.redd.it/cwzyk03j2npe1.png?width=806&format=png&auto=webp&s=d0197772d801cd7f15e9f317e79c0199b0fb163d)
[Fig 2.4. A more detailed look at the index](https://preview.redd.it/eg6p861q2npe1.png?width=916&format=png&auto=webp&s=9137514ca9dc0db417be1cd38bf9252c809451a0)
The manufacturing index has also seen better days. The manufacturing PMI has fallen from 50.9 to 50.3 in February. Now, in all fairness, this still means there is growth - any score above 50 indicates expansion - however, it means that growth is slowing down and seems to be at an inflection point, where it’ll start contracting again. Looking at the specifics, we also see details that show new orders and employment numbers are contracting, production and exports are seeing reduced growth, all while imports are growing at an accelerated pace. None of these show the signs of a confident economy. But perhaps most important to us degenerates, the stock market worries:
[Fig 2.5. Trillions wiped off the stock market in the last 2 weeks](https://preview.redd.it/0mndpd1v2npe1.png?width=1202&format=png&auto=webp&s=e0a513492d726a76f2b3c57b054ac238b7e89f8f)
I’m sure all of us remember last week, when our portfolios got bent over by trump refusing to rule out a recession. A recession. I don’t think it can be spelled out any clearer to even the passengers of the shortest of buses - Trump does not seem to mind, and in fact is open accepting of recession
[Fig 2.6. Google searches for recession surging](https://preview.redd.it/5xev3p0w3npe1.png?width=2338&format=png&auto=webp&s=c3f642682041e45ebcd926105b0be2647892d509)
Another decent indicator of recession is also the number of google searches you see for it - clearly, we're amidst another breakout.
[Fig 2.7. Holy fucking shit](https://preview.redd.it/v6p7emz44npe1.png?width=1010&format=png&auto=webp&s=ea9eae8a32a16633f308444716a58e680b97de93)
The long and short of it is that it’s not looking good. Crashing consumer expectations, cratering stock prices, manufacturing slowdowns - they all paint the picture of a recession coming up. Thus, with inflation not too bad, I believe that the FED should prioritise bringing back economic growth over keeping inflation down.
# A mispricing in the market
So, given the sorry state of our economy and comparatively better inflation control, you'd expect the market to price the chance of an interest rate cut at 40%, maybe 20%, maybe very low end, 5%. In reality...
1 per cent
According to a popular betting market, there is just a 1% chance Powell will change the interest rate today. Now of course, the betting market does not automatically correspond to what the stock market is thinking - however, any investor that sees an obvious arbitrage opportunity like this would be able to make a 100-fold return against tens of millions of dollars of liquidity if the stock market disagreed, so it seems to me that this accurately reflects the general sentiment.
Here's the most important part of my DD that I want to emphasise. In fact, if there’s any takeaway from my DD, let it be this:
I am **not** telling you Jerome will definitely cut rates tomorrow. In fact, anyone claiming to know for sure what Jerome will do tomorrow either has inside information, is lying, or is grossly misinformed. The first group will never talk to the likes of us, the second group is taking advantage of the likes of us, and the third group belongs among the likes of us.
No, all my DD hinges upon is the idea that the chance of an interest rate cut is higher than 1%. That’s all you need - the thought that interest rate cuts aren't being priced in correctly, and that’s where any real money is made - mispricings in the market. I personally don’t see how the chance of an interest rate cut is not higher than 5% - if your takeaway from my analysis is that it will be anything above 1%, you too believe, there is a mispricing in the market, and can profit from purchasing TLT.
So this begs the question of why there's a market mispricing
# Why is there a mispricing / “But you’re forgetting about…”
There are a couple ideas that people can bring up to suggest why interest rate cuts are unlikely - I’ll try and cover the main ones and deliver a rebuttal on all of them.
Firstly, there’s concern of inflation from Trump’s tariffs. This is not unfounded - tariffs are inflationary, and perhaps the worry of inflation is too great to cut rates. Firstly, I’d like to point out that many of Trump’s other policies are deflationary: deregulation and government spending cuts are both deflationary, and I don’t think we truly realise how likely “tail-end events” like cutting half of military spending is with an unpredictable guy like Trump - he’s discussed it before. Secondly, Jerome Powell himself has stated, at the University of Chicago Booth School of Business on March 7th, that tariffs may cause a one off price hike, but that “longer-term expectations remain stable and consistent with our 2% inflation goal”. A one-off rise in inflation will not need to be adjusted for - as Powell correctly ascertains, policies should only deal with persistent inflation.
Secondly, some will mention that Powell himself has said before that it is not in a hurry to cut interest rates. I will point out that these quotes are all from before March 10th, before Trump refused to rule out the chance of a recession, before the stock market plummeted and lost trillions of dollars, and before we saw consumer confidence sour so drastically. The situation has changed, and Powell is now much more likely to slash rates.
Finally, the previous point already alludes to this, but one idea is that there’s a conflict between Trump and Powell, in the way that Trump is almost trying to cause economic panic to force Powell into lowering interest rates. People will have you believe that big J, in an attempt to win this dick-swinging contest, will refuse to back down and keep interest rates constant. Maybe, maybe, but what's more important than winning the measuring contest is preventing the ruin that will come to millions if we fail to cushion economic downturn. Jerome does not want to be the guy who failed to do enough and saw America go through a recession or worse. In fact, I’ll go so far as to say the opposite - I think Powell is likely to fold now due to his past expereince. Many criticisms have been levelled against the man on account of the fact that he didn’t hike rates early enough in 2021, which led to out-of-control inflation. I think that it’s likely that he has learned from this mistake, and I’d err on him acting sooner rather than later on cutting rates.
Most important to keep in mind however, is that maybe you still have doubts about if Jerome is likely to cut interest rates. Keep in mind - we’re not asking if it’s more likely he’ll cut rates or keep them the same. We’re asking if the market is mispriced - if the chance he’ll cut rates is higher than 1%. Any bit of edge is a bullish indication for TLT.
# Ok, I think the chance of a cut is higher than 1%. How do I make money off that
Minimising risk. It's arguably the one of the core tenets of the stock market - the idea of a net worth rising in a safe and predictable straight line is tantalising to all but the most degenerate regard. It's why so many rich people are willing to take a below-market return from a hedge fund - there's a team of brilliant Asian quants out there who, instead of curing cancer or perfecting interplanetary travel, are creating the most ridiculous and incomprehensible financial products to tame risky and volatile assets into neat little beta neutral, uncorrelated returns that beat the risk free rate by half a percent, all for the price of a 2/20 fee structure. There's money to be made in lowering risk.
However, you’re in the wrong subreddit if you’re that brilliant Asian quant. As such, we’ll be doing the opposite - taking the safest investment in the world - US treasury bonds, and jacking it up to the tits in leverage to increase risk, in return for enlarged profits.
Firstly, treasury bonds are the asset of choice because I think that they will have the largest quick movement due to this mispricing in the market. Stock markets react unpredictably to interest rate movements - bonds do not. For those who don’t know, when interest rates fall, all new government bonds issued have lower coupon rates. As such, the old government bonds, with comparatively higher coupon rates, rise in value. This is why “government bonds rise in value when rates are cut, and vice versa”. This is even more so for long-term treasury bonds compared to short-term bills - since the coupon is paid out many more times, the rise in value is exaggerated too.
The liquid variety for long-term treasury bonds is the TLT, an ETF that tracks the bond price. Not only is the liquidity a plus, but the asset being an ETF allows you to buy options on it, letting you purchase different calls until you are sufficiently leveraged for your personal risk tolerance.
Unfortunately, I’m a broke ass college student who has an evil, satanic, institutional broker that doesn't allow me to buy options. So, I’ve spent about half my money on TLT shares.
[My 50 shares of TLT](https://preview.redd.it/tbh4scdn6npe1.png?width=2346&format=png&auto=webp&s=82ee7bedc1831d8ef90a20c15b062fcedfd5121a)
# What Next
Now, of course, I don’t know for sure if Jerome will cut rates. Here are my rough plans based on what happens next:
1. Rates get cut:
I’d expect TLT to rise sharply, due to the market not expecting this cut. Happy days. Probably sell and throw the money into a global fund, or maybe hold onto the position, anticipating more cuts throughout the year.
2. Rates don’t move:
Then in this case, TLT probably won’t move significantly, since the market is pretty much expecting this outcome. I’d probably hold onto my position a bit longer, since if he’s not cutting now, he needs to cut by May. This would also probably give me a generally bearish attitude on the US economy and stocks - I think this would be cutting rates a little too late. Probably start throwing more of my money into bonds and international markets.
Either way, I think that this mispricing in the market can be capitalised on. Good luck regards!
tl;dr - Due to a weak economy, I think there’s a higher than 1% chance rates will be cut (the market prediction), therefore, the markets have priced TLT too low