Earlier this month, frustrated with a lack of capitulation in US equities, I asked when the “big selloff” would arrive.
I wasn’t actually frustrated. My abrasive social media cadence notwithstanding, nothing much really frustrates me. Generally speaking, nothing’s worth being irritated over if you’re healthy, economically secure and you live in an advanced economy.
In any event, the point of the linked article (above) was just that 2022’s grinding bear market hasn’t manifested in a capitulatory purge in US shares, even as we’ve seen plenty of harrowing days in Europe and several existential routs in Hong Kong.
While there’s no shortage of obstacles, it could be that the “big one” (“Elizabeth,” for those of you old enough to remember Sanford and Son), will arrive promptly in the summer of 2023.
Why? Well, simple. Because according to STIRs, that’s when the Fed will have “succeeded” in creating the conditions (in markets, the economy and perhaps both) for a dovish pivot.
“Besides the next acute 1-3 month window of peak upside inflation data risk, alongside [an] immediate post-Fed ‘front-loaded liftoff’ period aligning as the equities ‘peak drawdown window,’ the real downside for equities comes when the Fed stops hiking,” Nomura’s Charlie McElligott wrote Tuesday.
Confirmation of an imminent slowdown or recession is “coming to you” midway through next year or in the second half of 2023, Charlie went on to write, only half-joking, referencing market pricing for a dovish pivot (figure above).
Fed officials dialed up the hawkish rhetoric early this week, as Jerome Powell appeared to telegraph at least one 50bps hike, while reiterating that, if necessary, the Committee will move policy into restrictive territory. Goldman subsequently changed their Fed call to include back-to-back 50bps moves in May and June.
“The punchline of the front-loaded hawkish attack on inflation is that the market is locked-in on a Fed easing nearly 40bps between Jun23-Dec24, as targeting outright restrictive policy in fast fashion will risk slowing the economy into recession — and in perceived short order,” McElligott said.
This, folks, is the price of procrastination. I’d say “I told you so,” but the truth is, I didn’t. Who am I? Larry Summers?
No recession until 2023? Sounds bullish! – says the market.
I don’t think our tea leaves tell us much, or anything, about 2023, including the pace of rate hikes, inflation, the war in Europe, the next covid variant, the (possible) flareup in influenza, food riots in Africa, nuclear war, Taiwan (& Chinese invasions), the midterm elections, riots in Russia, etc. I’m just along for the ride with few expectations.
The Fed has a long history of being dumb. Their rate call genius is comparable to blindfolded monkeys toss darts at pinatas.
“Little did the Fed know that the U.S. economy would reach its peak in August 1929. Tightening the credit market was supposed to shrink stock prices by maybe 10 percent, says Richardson, but definitely not 90 percent.”
I think Albert Edwards was quoted on this blog many times as saying, and I am paraphrasing this- the time to really worry is when the central banks are cutting rates not hiking them. That always stuck with me.
I’m still stuck with Powell admitting yesterday that the FOMC realized last Fall inflation was beyond transitory yet they inexplicably continue to pump in the QE…for me that’s a head scratcher and admission of incompetence….am I missing something…?
I have read about folks looking past the ‘70s to the 1940s as an analogue for today. Though not completely in full alignment, I wonder if the late 1930s are a better comparison for where we are. It was reserve requirements, pulling back fiscal spending and the introduction of social security taxes then. Today it is the pull back from pandemic spending, balance sheet run off and rising rates. Tough to thread the needle for Jay and his crew, given what continues to be thrown at them.
It goes without saying that preventing a broader war beyond what has happened to date will go a long ways to making the eye of said needle a bit larger, which is outside of the Fed’s control.
H-Man, the read is right but timing may be off. The storm will appear by May when 50 bps hits. By the fall, with another or several 50 bps hits, the market will wake up and go south.Just a matter of timing which makes a market.
I spent some time recently thinking about if and how the (equity) market could mount a sustained rally in 2022 if equity investors convince themselves that “the recession” is still a year off.
Why would equity investors think that? Maybe rationalizing a response to TINA, a “greater fool” strategy, a reaction to positive 1Q reports, taking the bond market’s dot plot literally, a compulsion to bargain hunt, an end to the war, etc.
What would they buy? Reflexively, in the “late cycle” they’d want to buy big tech, heavy industrials, energy, commodities, big pharma, stuff like that.
Would the numbers from those companies look good enough to support that buying? I’m not sure, for some of those groups I do expect decent reports for the next couple qtrs, and some have superficially okay valuations. Like if you assume $100 is the new floor for oil and pretend that XYZ’s reserves will last indefinitely, then energy valuations still look buyable.
Is this going to happen? I wouldn’t want to do it, I don’t think it “should” happen, but I guess we need to watch for signs that investors (you know, the “other guys”) have decided “we’re tired of waiting for capitulation” and/or “I’m being told cash is too high and I can’t think of anything else to do but buy stocks” so “let’s cross our fingers and treat this as a late cycle bull market and buy”.
Watch what sectors are leadership. If it’s uber growth profitless tech down -50% to 20X sales making a short-covering lunge for 22X, that’s one thing. If it’s the classic late cycle playbook sectors, that may be more significant.
Greenspan from about two years ago:
“Monetizing the debt cannot be a long-term solution, and increases in the money supply relative to the real goods and services an economy produces will eventually lead to higher price levels,” wrote Greenspan, who is now a senior economic adviser to Advisors.”
In hindsight the solution to save the globe from a great depression had to be massive global inflation, there had to be massive cash flow to keep things liquid, versus frozen. The outcome of too much cash chasing too few goods was obvious two years ago, but here we are.
The problem obviously, is that real goods were produced, but the artificial demand overwhelmed the supply, resulting in inflation and a massive amount of debt.
I think the supply, demand and inflation stuff will work itself out faster than expected, simply because, all that synthetic cash is being burned up by people paying higher prices for stuff.
What were left with is the Fed/treasury debt and the magic show of pretending raising rates will solve something.
If anyone was paying attention to GFC Fed stuff, the process of dumping their MBS toxic treasure was a decade long unwind that didn’t go well, and just as that mess was being managed, along comes Trump bumping Fed debt up by over $7 trillion, then along comes the pandemic, and bingo, it’s all sleepy Joe’s fault.
This next round of debt management is going to be highly polarized and politicized and will be as glacially slow as the GFC.
I seriously doubt the stock market or housing market will go into a tailspin while the economy is still growing and I assume that ad the money supply shrinks, the Fed will buy another decade of time and dump another round of toxic crap.
But which Fortune 50 company will they take over this time in the guise of a “rescue” using a conservatorship to royally screw over all share and bondholders so that they can add the income of that company to the Federal balance sheet?