Thread by @Mayhem4Markets

This is not a normal stock market.

Having stocks double, triple, and quadruple in days, weeks or months is not how price discovery should work.

But when we factor for extreme front-loading of QE and rate cuts last year during the COVID crash, this is a natural reaction.

1/X 🧵

First have a look at the Fed's balance sheet. Notice that enormous gap up? That's where trillions were injected all at once, followed by $120B/month of QE (jagged, slower rise up).

After GFC it took *years* to reach trillions, during COVID crash saw trillions enter in days.

2/x

As we can see in the NYSE/FINRA margin debt chart below, the trajectory of margin debt was compressed and parabolic similar to that of monetary policy, as were upward price revisions of the S&P 500 (and just about any other US/world stock index).

3/x

🖱️ yardeni.com/pub/stmkteqmar…

What all of this means to me is that this stock market is driven by an extremely large, front-loaded, and compressed credit cycle.

Of note: the "bear market" lasted three weeks and was met with about $3.25T of immediate Federal reserve stimulus, followed by $120B/month QE.

4/x

Why does this apparent compression of the front-loaded credit cycle matter?

Because it is indicative of a stock market that is likely to have a shorter, sharper period of upward price revisions (as we can see in the charts above).

It also likely means it will end rapidly.

5/x

The Fed is likely to do whatever it can to signal that the tapering of QE is to be a long, slow, and carefully orchestrated affair in an attempt to stave off another taper tantrum. But I think the market is still likely to price it all in at once as a discounting mechanism.

6/x

Because this, and every other recent bull market, started with greater and greater amounts of Federal Reserve stimulus, it is likely that the new "rate hike" is actually talking about tapering (not even necessarily doing it). A slowdown of liquidity would prove devastating.

7/x

This is of course just my own interpretation of the credit and equity markets and I could be quite wrong. I do think we're still early-to-mid cycle for now, and the later part of this cycle sees a bigger boom in commodity prices and a real reflation rotation trade.

Not yet.

8/x

When we do get to later cycle, we're likely to see 10 year rates above 2%, 30 year rates above 3%, an expansion of the yield curve, higher CPI data (w/yoy comps to times of more normalized inflation), higher labor force participation, and rising wages. Those will be signs.

9/x

For now, in my view, markets may favor tech/growth until this part of the cycle concludes and we begin to really see a pickup in real world economic activity that aren't yoy comps w/a recession.

Hope this is helpful. All meant to be informational. Not investment advice.

10/10