Global stock markets are taking a hit. The fear trade is back on with money running into the US Dollar and bonds. Members of our free discord group were given various options of shorting global markets, particularly those in Europe and Asia, but the US stock markets also broke our major support levels days ago.
The question is why? If you are one of those macro investors/traders who believes that stock markets and other assets are propped only due to cheap money, well then you have been waiting for this time period for a long time.
Inflation here is the key, but geopolitical uncertainty is definitely another thing keeping markets on edge. There are also major happenings over in Asia but that has to do with the inflation aspect so I will cover that too.
Notice stock markets have sold off whenever a Fed President has come out very hawkish. We had Fed Brainard talk about tapering the balance sheet to the tune of $95 billion per month. We have had Fed Williams say a 50 basis point hike is ‘reasonable’. Now we have the big boss himself, Fed chair Jerome Powell, saying more rate hikes are coming. That inflation must be absolutely tamed and the Fed is committed to raising rates ‘expeditiously’ to do this.
The stock markets are feeling it when the Fed hasn’t even begun to lift rates. We are only at the beginning stages of this tightening cycle.
Many traders are confused because they assume markets have already priced in 6-7 interest rate hikes. They are correct, but things have gotten complicated. A stark realization has taken place.
If you recall, for many months the Fed has been telling us that this inflation is only transitory and temporary. That inflation will disappear on its own. Essentially, markets believed because of this transitory nature, the Fed would not need to raise rates as much. 6-7 rate hikes would take us to around 3%, but that’s okay if inflation magically reduces on its own back to around 2% as the Fed said it would. Many in the markets believed this. But this has changed.
If you are versed in classical economics, or just followed my work here on Equity Guru, then you knew this was coming ever since the Fed began printing boat loads of money. Money supply growth is fine as long as productivity expands too. It did not. Now we are in a situation where there are people with more money competing for the same number of goods and services.
Let’s call this ‘permanent’ inflation as opposed to transitory. If inflation is permanent as us contrarians have been saying, this means the Fed will have to raise interest rates multiple times. And I mean higher than 8.5% which was the last CPI print. The stock markets are beginning to understand the Fed is behind the curve. The stock markets are beginning to understand that the Fed will need to bring down stock markets and other assets to tame inflation.
What many people are not understanding is that basically the Fed was wrong! This point is very important as it plays into our idea of a confidence crisis. The way the Fed has been hiding this has been by blaming global supply chain disruptions and the Russians.
Inflation is here to stay folks. The Federal Reserve and other central banks will need to do two things. One, raise interest rates above the current rate of inflation. Two, sell off the balance sheet. In doing so, they will probably cause an economic slowdown or a recession, which is what the bond markets have been pricing with that inverted yield curve a few weeks ago.
What could change this? Some sort of deflationary event which causes the Fed to pause policy and even go back to cutting rates. Some contrarians think the Fed and other central banks are hiking 50 basis points desperately here just so they have 100-200 points to cut when the next slowdown occurs. What adds even more concern comes from Asia and the epic decline of the Japanese Yen. The Bank of Japan could be breaking as they remain the only major western allied central bank to remain easing while the rest are tightening. I wrote about why this is a big market moving deal and will impact your investments, and your life. I encourage you to read it because the Bank of Japan is at the forefront of my trading eyes.
And other things are happening in Asia:
A very large move in China. It looks like the People’s Bank of China is devaluing the Yuan. In five trading days, the Yuan has taken out price levels which have been held for a good 365 days.
The Hong Kong Dollar is approaching the top of its peg, with many big money hedge fund managers expecting the peg to break one day. Are we at that time now? We will have to wait and see.
The Korean Won is also set to break above a major technical zone on the monthly chart…which could see us move back to 1998 lows. Yes I know. Crazy. But many others are already forecasting an Asian crisis kicking off with the Bank of Japan. All of this has to do with interest rates rising.
On the S&P side, we remain below our major resistance zone of 4390-4400. This resistance must break for me to turn bullish again. As of now, it does appear 4150 could be tested this week or the next. The big question then becomes do we bounce or breakdown from there?
A lot of things here are impacting the markets. You have to be following the geopolitical developments, inflation, and the on goings in Asia. I remember a popular market investor saying that central banks will keep raising interest rates until something breaks. We haven’t even begun to lift off and it appears as something is already breaking. Prepare for some volatile months ahead.