Stop Trading the Fed Funds Rate
Updated
The fed usually hikes into growth and eases when it realizes the economy is too weak to absorb the impact of the hikes, so historically stocks usually rise as the hiking begins and crashes when the fed takes their foot off the pedal.
This time the fed is late. They hike as the housing market is brought to its knees and the economy is slowing. Equities are down, but this is not due to recession expectations. The bond market has reacted to rate hikes, bond yields rise, the discount rate affects the equity market by eating away at their earnings targets. The higher the yield is, the more your company has to make than that in growth to give incentive to invest in it over just holding fixed income. Rate hikes have many systemic effects like this that increase the cost of credit and directly impact the equity market.
If you're holding risk assets you're better off with the Fed holding the line with the hikes in the short term. In the longer term we are screwed no matter what levers the fed pulls. Monetary magic can not save the economy now.
Easing or slowing the hikes (which isn't my prediction, but a market's hope) would be a signal to another group of market participants that we haven't seen sell anything yet who are trading based off of what easing signals. So far equities have only reacted to changes in the discount rate. They have not started pricing in a recession and current price action is a bet on temporary economic contraction with no hard landing.
Three different recession, three different initial conditions, same market behavior:
The probability of a soft landing is zero percent. The mystery of this market isn't the direction it's how low it's actually going to go. The more funny retail money enters this market, the higher the chance we could see unprecedented drawdowns far worse than anyone so far has expected.
Everyone in retail, their aunt, uncle, grandma, and dog, is trading speculatively based off the fed funds rate. They believe that a change in the pace of hikes or basis point increases will breathe life into the economy. They have not traded a market like this before.
If you think the economy can recover without a crash, park into cash and sit this one out. Stop listening to these talking heads in mainstream media telling you everything will be ok. You are the customer and the product holding up their portfolio as they exit leaving you holding the bag.
This time the fed is late. They hike as the housing market is brought to its knees and the economy is slowing. Equities are down, but this is not due to recession expectations. The bond market has reacted to rate hikes, bond yields rise, the discount rate affects the equity market by eating away at their earnings targets. The higher the yield is, the more your company has to make than that in growth to give incentive to invest in it over just holding fixed income. Rate hikes have many systemic effects like this that increase the cost of credit and directly impact the equity market.
If you're holding risk assets you're better off with the Fed holding the line with the hikes in the short term. In the longer term we are screwed no matter what levers the fed pulls. Monetary magic can not save the economy now.
Easing or slowing the hikes (which isn't my prediction, but a market's hope) would be a signal to another group of market participants that we haven't seen sell anything yet who are trading based off of what easing signals. So far equities have only reacted to changes in the discount rate. They have not started pricing in a recession and current price action is a bet on temporary economic contraction with no hard landing.
Three different recession, three different initial conditions, same market behavior:
The probability of a soft landing is zero percent. The mystery of this market isn't the direction it's how low it's actually going to go. The more funny retail money enters this market, the higher the chance we could see unprecedented drawdowns far worse than anyone so far has expected.
Everyone in retail, their aunt, uncle, grandma, and dog, is trading speculatively based off the fed funds rate. They believe that a change in the pace of hikes or basis point increases will breathe life into the economy. They have not traded a market like this before.
If you think the economy can recover without a crash, park into cash and sit this one out. Stop listening to these talking heads in mainstream media telling you everything will be ok. You are the customer and the product holding up their portfolio as they exit leaving you holding the bag.
Note
Current timeline:
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