What do markets look like when they are freaking out?
Answer, like they look this week.
Why? The realization/fear that the Fed is going to slam on the brakes ... hard. And the panic that the stock market is going to get thrown through the windshield.
A 🧵to explain
2/10
Let's start with Tuesday (Jan 18). The SPX was down 1.8% the same day the 10-year yield was up 9 basis point.
This has only happened seven times since 2000
3/10
And today
The S&P was up 1.53% at today's high. It closed down more than 1%.
Only 8 times since the Global Financial Crisis in 2009 has the S&P 500 been up more than 1.5% intraday and then finished down more than 1%. And 4 of the 8 were in March 2020 (bolded)
4/10
The RTY, it has been argued are a better metric of the state of the economy than the SPX. RTY is 10% foreign revenues where the SPX is 40% - 50%.
RTY is getting murdered, now corrected more than 17% (bear market down 20%).
The SPX is down just 6.5%
5/10
I'm going through the exercise to confirm what we all suspect; the stock market is indeed have unusual movements that you only see a handful of times a decade.
Something more than a standard correction is underway ...
6/10
... maybe a realization/fear that the Fed is going to "address" inflation and slam on the brakes ... hard.
Restated, if the Fed is going to slam on the brakes, you would expect markets to freak out. They are freaking out; this is freaking out!
7/10
Why is this happening? Professional managers "blew it." They continue to believe inflation is transitory and the Fed is merely "jawboning."
This is the Jan BofA fund manager survey, out Tuesday. Majority think inflation is STILL TRANSITORY!
8/10
The Ds are panic their polling is terrible, and they will get crushed in November. The #1 issue is inflation.
Biden said it clearly yesterday, he green lighted the Fed to "stop inflation." If that means slamming on the brakes hard, so be it.
Fund managers still think the Ds will be ok in Nov (chart), even though the betting markets expect a wipe out.
They failed, or are failing, this get that this year is about making 40% of the population with less than $1,000 in savings and rents "not mad" about inflation.
10/10
If the stock mkt has to be sacrificed, then it will. And if fund managers are not positioned for this reality, we would expect chaotic markets...like we now have!
This started 3 weeks ago when the bond market was crushed, explained in this thread
The table above has a mistake I just became aware of ... March 21 and March 22 are a repeat of March 20 (they are also a Sat and Sun). My sort accidentally included them.
So, it is 5 times since 2009 and twice in March 2020.
Here is the corrected table.
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Total asset growth stalled in March. iShares IBIT (blue) is taking a bigger and bigger share from Grayscale GBTC (orange). Everything else (red) is about a third.
3/9
Daily/Cumulative Flows
$18B in cumulative flows (black). Where did most of it come from?
Hedge fund basis trades (not directional bets) and transfers from on-chain to tradfi accts.
$COIN retail flows are down as they compete with ETFs for retail flows. Stock down too.
China's Govt keeps firing one stimulus Bazooka after another.
Today's installment ...
SCMP: Shanghai, other top tier-1 cities ease ownership curbs in boost for China’s housing market
Results in ...
*CHINA PROPERTY STOCKS GAUGE JUMPS 11% AFTER EASING MEASURES
And causing ....
*CHINA'S CSI 300 UP 22% FROM SEPT. LOW, HEADED FOR BULL MARKET
(biggest such rally since 2008)
2/3
The Chinese finally stimulating domestic demand gives hope that they will start to consume more.
This idea is significantly contributing to this unfolding rally in industrial metals.
Example
*IRON ORE SURGES ALMOST 8% AS CHINESE CITIES EASE HOME CURBS
3/3
Why should we care?
If the Chinese keep firing these stimulus bazookas, the commodity rally should broaden to energy. The Chinese consume more energy than the U.S. or the EU.
Remember, Powell wants a 12-0 vote for every policy decision. He is now working the phones by calling every FOMC member to "horse trade" into a 12-0 vote.
He believes that a 12-0 vote gives policy credibility. Dissents, in Powell's opinion, create doubt and uncertainty.
Powell explained this to Davis Rubenstein in July.
---
From the raw transcript, I edited it for readability
7:58 Powell: The way it works is I talk to the other 18 participants regularly. I speak to them at least once ten days before the meeting and think about this three or four weeks before.
What should we want to achieve? What data do we need to see? How do we want to change our Communications? All those things.
So, I talk to people, listen to them, and try to put together an answer that has broad support on the committee. So when we go into the committee on Tuesday morning [its start], I'm usually confident that I know where this will go.
8:55 Powell: These call calls are generally scheduled and go all day. The Friday before the meeting, I think I have 11 half-hour calls. We talk about the economy, we talk about very specific aspects of the economy, about our mandate, and then we talk about policy, so there's a lot to talk about. I take careful notes.
You can hear him explain it here.
3/3
Since Powell wants a 12-0 vote, he effectively gives everyone a veto.
See the chart above and the annotation about Waller. Waller is arguably the most hawkish member of the Fed. So, if the Fed wants to cut, it can only go as far as the most hawkish member agrees.
The probability of a 50 basis point cut was 60% right before Waller spoke, and it was 20% after he was done. In other words, Waller left the strong impression that he was good with a 25-point basis cut, but no more.
The Fed has only seen two dissents in the last four years. Both in 2022 (highlighted). This is the smallest number in over 70 years.
Again, this is how Powell designed it.
So, as he explained above, when Powell went through his 11 half-hour calls yesterday, and the market was 50/50, he had a lot of "horse trading" to do before a decision could be made (a 12-0 voting agreement).
Then, certain reporters are viewed as "Fed whisperers" who can be called and told "blue horseshoe likes a cut" and let them write a story that "signals" to everyone what will happen at the meeting.
I expect this story on Monday morning.
If not, then this process I described might be changing and could stay changed going forward, leading to more uncertainty and higher volatility.
Before the June 15, 2002, and March 22, 2023 FOMC meetings, the odds of a Fed move were very uncertain, ~50/50.
@NickTimiraos's stories right before these meetings removed uncertainty.
Yesterday's story created uncertainty (chart).
🧵
2/5
Going into the June 15, 2022, FOMC meeting, things were uncertain with a 35% - 45% odd 75bps hike.
@NickTimiraos cleared it up with this:
June 13, 2022 (48 hours before the meeting)
Fed Likely to Consider 0.75-Percentage-Point Rate Rise This Week wsj.com/articles/bad-i…
3/5
Mar 7, 2023 SVB fell. The odds were 100% for a 25 bps hike before March 7. They fell to 55% a week before the Mar 22 FOMC meeting.
Timiroas cleared it up on Mar 20, sending the odds back to 86%