Morning chaps,
So yesterday there seemed to be quite a flurry of posts.
Bear markets are actually quite easy to see coming, after all, it is simply an inverse of the rule: never fight the Fed.
The US economy is still the largest in the world. The US economy is now and has been for some time the financial markets. Therefore when the US financial markets are in trouble, all financial markets are in trouble. Any number of economies will crash.
The FFR (black line) is the rate under the control of the Fed. You can see when it inverts, we have bad outcomes (black above the green). Currently the Fed is raising the FFR. We will get another 75bps and the chatter is for potentially 100bps. For stock markets, that is very bad.
As a comparison:
The US dollar strong. Why?
Because as the FFR rises, Eurodollars become increasingly burdensome upon their holders. ATM Eurodollars are a sell and will continue to be a sell until something breaks, similar to the upper chart. Why did the upper chart break in Oct/Nov 2019? Go back and look at the yield curve. A sell of Eurodollars is a buy for dollars.
SPY
Your market
Why will this bear get worse?
Very simple: inflation, as it has already demonstrated, upsets the peasants tremendously. The pitchforks and torches come out. Politically this is suicide. Therefore, Mr Powell has been tasked with lowering inflation fast.
One way to lower inflation is to create a recession. A recession dulls demand.
There can be no 'Volcker' moment as every 100bps rise in the FFR adds $300B to the interest burden on the US National debt, currently sitting at $31T. Never mind another $100T in Medicare/Medicaid/Social Security. Never mind you military etc.
Add in Mr Putin and China, who are now fully engaged in attacking the dollar and thereby ending the 1 tool that the US has relied on since 1971 to dig itself out of the shite. Imagine if the US had to pay for energy, rather than printing up some paper for it.
The Fed will pivot. At some point they have to. If they don't, then we will have a repeat, only worse of the 1930's. That market declined 89%. This of course is a DEFLATIONARY bust.
If/when Mr Powell pivots, the issue once again returns to an inflation issue. Stocks do not do well in an inflationary environment. Simply look at the 1970's. (1969 - 1982).
True bear markets save the worst for last:
This is a true bear market. It is so because, the Fed is now powerless. They raise rates, they kill the market, the economy and all the crony politicians. They lower rates, they kill the market, the dollar and all the crony politicians.
The next shoe to drop will be the liquidity crisis. Pressure is already building:
What is a liquidity crisis?
Simple: no buyers and lots of sellers.
In previous liquidity crises, the Fed has become the buyer of last resort (re-liquifying the market). Currently, the Fed has just increased the QT programme from $48B/month to $95B/month. That is to say the Fed is a seller, not a buyer. LOL.
Those that are awake will know that bank accounts in a number of countries have been frozen at some point. Cash in a bank account is not 100% risk free.
Markets have been closed on numerous occasions, sometimes for years. Capital in brokerage accounts/markets is not 100% risk free.
If you don't hold it, you don't own it is the maxim that today is critical to understand.
jog on
duc