Last week’s memo explained why walkbacks could be in the cards in relation to the Fed’s hyperhawkish stance.
As hawkish as it gets.walkback on road?
This week, we made our point in our next media appearance. Here are some themes (show notes) that I covered in my segment:
Stock market: September is the weakest month of the year. The weakest week of the year is this week.
The S&P 500 fell 22% year-on-year, but earnings forecasts fell just 3%.
Like the June lows: Lower expectations for earnings season. +3.2% growth (low hurdles, expect upside surprises).
The biggest policy mistakes in the Federal Reserve’s 110-year history:
December 2018: His first “autopilot” error caused 16.5% of crashes before Christmas. Mnuchin had to call six bank CEOs to provide liquidity to the market before Powell withdrew his statement, pushing the market to new highs in months. .
GDP forecast for 2022 +3.8%.
PCE inflation is 4.2%.
federal funds rate 0.1%.
GDP forecast for 2022 +0.2%.
PCE inflation is now falling.
federal funds rate 4.6% estimated in 2023
Winston Churchill said, “A general is always ready to fight the last war.
Powell called inflation Temporary When I was roaring, now I want to be Volker when I’m crumbling.
Mr. Powell and his company will have to recant their hawkishness. Here’s why.
- Inflation is rolling over:
Source: Carl Quintanilla Liz Ann Saunders
- Every 1% rate hike adds an additional $285 billion annual deficit in interest expense. When debt/GDP was 30% from 1980 to 1982, rate hikes were easy.122%, not much. They inflate it by keeping inflation over trending his 3-5% for several years, like after World War II.
- If governments, municipalities, and businesses cannot refinance, the credit markets will force their hands. It happened in England on Tuesday.
Hawkish Talk/Guidance has acted as a five-year inflation break-even (a proxy for inflation expectations) and today fell to 2.37% (a 15-month low).
Manager’s feelings/positionings on the apocalypse:
Extreme readings like these usually portend major turnarounds in the market.
–Greatest Expectations of a Recession Since April 2020 and March 2009 (stock market bottoms were on both occasions).
-Lowest percentage of managers”Overweight equitiesin history ”(-52%). 2008 pandemic lower than 2020 and GFC.
-Cash allocation is the highest since 2001 (6.1%). Higher than GFC and pandemic lows.
-Current AAII Sentiment Survey: 17.7% strong.pandemic low 20.23%. GFC Low 18.92%.
-If you can intervene to the extreme when volatility and fear are high, you can get very large returns over time.
take the other side. Looking ahead a few months, the “pain deal” is up.
US Midterm Elections: The stalemate result is bullish for the market – no new taxes/spends/major regulations.
–short usd: Commercial hedgers short aggressively (as before peaks in 2020, 2017, 2015, 2013, 2009, 2006).
–10-Year U.S. Treasury Bond: Commercial hedgers are aggressively long (as was the case before the bond rally in 2018, 2014, 2011 and 2009)
–S&P Futures Long: Commercial hedgers are aggressively long (similar to the case before the stock rally in 2020, 2016, 2011 and 2009)
Which central bank will flash next?
After June’s lows saw Italy’s bond yields hit a nine-year high, the ECB blinked and reopened its new QE facility to buy peripheral government bonds. (Bloomberg)
The Bank of England blinked and resumed quantitative easing yesterday after yields surged and the currency plummeted. (CNBC)
The Bank of Japan didn’t even pretend to tighten. They buy bonds all year round, with a 10-year yield he has set at 25bps. (Japan Times)
Authorities in Indonesia, Japan, China, India step in to defend their currencies against a strong US dollar (Bloomberg)
Will the Fed be next? Just yesterday, Chicago Federal Reserve Governor Charles Evans said he was concerned that the US central bank was raising rates too quickly to combat runaway inflation. (CNBC)
Source: RBC and Evercore ISI
The latest in biotechnology
1) Major advances in medicine
Source: Morgan Stanley
2) Major developments in the deal
Alibaba (BABA) Update
What does it do at the lowest of all. Retest lows to eliminate weak hands that don’t understand the intrinsic value/sum of partial analysis.
Thawing US-China relations (inevitable or despair)?
Full article: (scmp)
Further consolidation is expected before credit markets reopen and refinancing for the next catalyst. As semiconductors flow, OEMs continue to improve problem-free delivery.
We then turn to a short-term view of the general market.
This past week’s AAII Sentiment Survey results show that bullishness rose to 20.0% from the previous week’s 17.7%. The bearish percentage ticked from 60.9% to 60.8%. Retail sentiment is below the pandemic low (20.23) and approaching the Great Financial Crisis low (18.92).
CNN “Fear and Greed” dropped from 31 last week to 19 this week. Emotions are very scary.
And finally, the NAAIM (National Association of Active Investment Managers Index) fell to 29.59% this week from last week’s 33.86% equity exposure. No more good news and managers will be forced to catch up at the end of the year:
Authors and/or clients may have beneficial holdings in some or all of the above investments.