Frayed Nerves, Lit Fuse
Barring some manner of good news on the geopolitical front, it'll be another challenging week for risk assets. Although the White House said Sunday evening that Vladimir Putin and Joe Biden agreed "in principle" to a summit brokered by Emmanuel Macron, the drums of war will continue to beat loudly in investors' ears.
Of course, "challenging" doesn't preclude a rally, nor does it guarantee steep losses. Challenging just means the headwinds bedeviling sentiment haven't abated, so nerves remain fr
Nobody wants the short end because they think a recession is imminent. Nobody wants the long end because they think Fed hikes are imminent.
…and nobody wants equities because they think any rally will just cause the Fed to hike even harder.
So what we’re left with is everyone holding cash while worrying about inflation. Is it any wonder that the Old Guard is doing the media rounds, warning that the Fed is behind the ball? This is going to culminate in an organized recession. The Fed “saves face” with the dinosaurs who insist that they have to keep up appearances, retail gets wiped out, and the street gets to waltz in with its cash to buy everything up at a discount.
It doesn’t have to be this way.
Jon,
Re:. Dinosaurs
“Charlie Munger compares crypto to ‘venereal disease,’ warns of inflation danger”
As Charlie edges closer to the century mark he seems to be getting more acidic in his attempt to be witty. I thought his remark on crypto was funny but it also made me think of elevator operators that were sort of shoved aside by automation and the possibility that their career expertise had run it’s course.
There is a lot of ambiguity and chaos in terms of market direction, and obviously a recession is a future possibility.
Unfortunately, I think the Fed is going to repeat it’s genius playbook from 2018 when they raised rates too fast, then ended up immediately going, oops… But in this current setting, if the Fed makes an oops, we might end up in a real bad place!
I reviewed the FRED Fed Funds Chart, the CPI annual percentage change chart and the SPY chart from 1980-present. I started with 1980 because that seems to be the beginning when the Fed began taking an outsized role in the US markets resulting in an equal and opposite declining influence by “free market forces”. I believe this dynamic will remain in existence for the foreseeable future.
On inflation and supply constraints – I continue to think they will subside. This is based primarily on reading the Q&A transcripts from numerous December 31, 2021 quarterly earnings calls- in which CEOs/ CFOs indicated that this issue has likely peaked during the March, 2022 quarter with expected continuing improvements during the remainder of 2022.
On Ukraine- as tragic as the folding of Ukraine into Russia would be from the standpoint of humanity, the impact on the US equities markets will not be negative- other than maybe from an initial over-reaction. Look how quickly the world has overcome the tragedy of China’s treatment of Hong Kong and how the world continues to ignore the tragedy of China’s treatment of the Uighur. The historic pattern of mankind’s reaction to human tribal transgressions against other human tribes is quite ugly. Collectively, this is our reaction: we emote sadness and outrage followed by an ineffectual battle or, more likely- we just stop talking about “that”. There is a long, long list of human tribal transgressions against other tribes, done mostly for monetary gain, without any significant regard to the moral crime.
My conclusion- stay long US equities.