Second-Order Thinking

When you think about the likely evolution of Fed policy for the remainder of 2024, you pretty much have to toss out the distinct possibility that high rates are actually working at cross purposes with the inflation fight. Despite copious evidence to suggest the Fed's demand problem (i.e., there's too much of it) is at least in part a function of the billions in interest income minted monthly by money market funds, and despite the flagrantly obvious role high mortgage rates continue to play in p

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11 thoughts on “Second-Order Thinking

      1. RSP is the equal weighted S&P 500 index, so the smallest market cap company has the same weight as the largest

        SPY is the S&P 500 index ETF with the usual market cap weighting

        QQQ is the Nasdaq 100 ETF

    1. Yes, but my gut instinct (continues) to tell me to put everything allocated to equities into SPY.
      RSP 1.27%
      SPY 4.18%
      QQQ 1.15%

  1. FWIW: A 10% correction in stock indices — we’re more than halfway there — will tighten financial conditions enough to keep the FOMC on track. Higher for longer implies that getting back to 2% will also take longer than many thought.

    1. Street expectations for first Fed cut are rapidly moving to early 2025. Expectations routinely overshoot – recall 6-7 cuts in 2024? – and likely will here too.

      If economic growth continues solid-ish, and recession fears further reverse, yield curve may flatten. So 1Y UST to 10Y UST to mid 5s?

      Econ growth continues -> earnings growth broadens out? Growth less scarce -> valuation premium for growth declines? Higher rates -> long duration asset valuation declines?

      That’s why the comment about RSP vs SPY vs QQQ.

      I’m very interested to see the effect of 8% rates on real estate values and development.

  2. Great writing…McElligott’s “own goal” and your “grudging about-face…crashing the proverbial plane” made me laugh loudly at Powell’s colossal screw-up. It’s terrible but almost expected from the guy who said the balance sheet run-off is on autopilot, then reversed course, “transitory inflation,” etc., etc. Truly sad and my heart goes out to him. He’s the face of “the Fed.” Truly monumental mistake that’s just beginning to play out. Nice job, H, of describing how Powell has contorted himself inside a very small decision-making box.

    Probably see big bounce soon and lots of “don’t worry about it” and “everything’s fine” talk. Sure. Clear skies for miles lol. Just ask Yellin.

  3. Forgive my ignorance, but aren’t rising long-term rates rates, the un-inversion of interest rates in general, and a more moderate stock market, all part of a “softish” landing scenario?

NEWSROOM crewneck & prints