Markets have now fully priced in a Fed pause for 2023. There is only one problem - it's a total fabrication. Which means that this market is now priced for a high altitude explosion.
Any questions?
As it is with all problems this Idiocracy faces, they are now painted into a denialistic corner of their own making. And still they are somehow totally oblivious to that fact.
Yesterday, the Fed raised rates another .25%, to the highest level in 22 years, and they signaled they are ready to hike again in September if necessary. Bulls took that to mean that rate hikes are over. Hence, they have now vaulted the Dow to the longest winning streak since 1987. I would be remiss if I didn't remind everyone that it was the combination of Fed rate hikes and market melt-up that preceded the crash in 1987.
The problem with fully pricing in a pause is that there are multiple inflation reports and job reports between now and September. When the Fed paused back in 2007, inflation rebounded sharply. Currently, the CPI has already fallen for 12 months straight which is the longest monthly streak in over 40 years. Betting on another month of falling CPI is like betting on another Dow up day. They have a similar probability except if the CPI turns up again, the Dow is going to have a down year, not a down day.
Today, we already got news that GDP is re-accelerating. This chart shows that consumer sentiment is chasing markets. It used to be that markets follow the economy, but now the economy follows markets.
It's only a matter of time before the inflation downtrend reverses.
We also learn that money managers are no longer hedging, which is why per BofA/ZH: "It has never been cheaper to hedge a market crash". From a nominal cost standpoint, S&P puts have never been cheaper. That's because there is ZERO risk management in this market. You see, despite put options being record cheap, that does not prevent them from losing 100% of value in a melt-up such as the one we've been in since mid-March. But money managers can't afford to lose more relative performance to the most narrow market in history that is now powered by a "Magnificent Seven" stocks.
Which is why we see that even as active manager risk exposure has round-tripped back to the highs of late 2021 (lower pane), the index over-weighting to Tech is now MUCH higher.
Which is a disaster wanting to happen.
All of which gets us back to a Fed who continue raising interest rates while keeping their balance sheet at double the size it was pre-pandemic. At the rate they are rolling off the balance sheet, it will be several years to normalize. In doing so, they are favouring the wealthy over the middle class.
Which means that when markets explode, the middle class will be pre-imploded by two decade high interest rates. And consumer sentiment will collapse like a cheap tent.
It's the same mistake the Fed made in 2008.
"As late as August 2008, there were no clear signs that many financial firms were about to fail catastrophically"
Same.
