There’s lots of stuff happening in markets that’s never happened before. That makes things interesting and, financially speaking, dangerous. The Fed has never had this big of a balance sheet to run down
There’s lots of stuff happening in markets that has never happened before. That makes things interesting and, financially speaking, dangerous. The Fed has never had this big of a balance sheet to run down or kept Fed Funds so far below inflation or tried to fix a global supply-side shock with US monetary policy. (Good luck with that.) It’s all unprecedented, so there’s no reason to think the past will be any sort of guide to the future. But the past is all we’ve got to go on, so let’s look at some charts, anyway.
We live in interesting bond market times:
The year-to-date rout in bonds is the worst on record. That’s probably good news: The fixed-income market is doing the Fed’s job for it. Now we just need stocks to play along.
Fun fact: More than 50% of all Treasury bear markets have occurred since 2009:
That’s what happens when you buy Treasurys yielding near zero. But losing money in bonds should no longer surprise anyone, at least. Financial markets hate surprises.
Will we get the recession the Fed seems intent on creating?
For all the attention that the 2s/10s curve gets, the easier tea leaves to read is the spread between 2-year yields and the Fed Funds rate. When the 2-year is substantially below Fed funds, recession is imminent. We’re not there yet. We’re not even going in that direction. Yet. Which is possibly why the stock market seems not too concerned about things.
But maybe it should be?
Layering one time period over another is my least favorite type of chart. But this one comparing 2022 to 2008 is a reminder that stocks are sometimes slow to get the memo. (See, also: 1987, 2000.)
History suggests the memo may arrive in about two months:
Equities tend to do well in rate-hike cycles — unless the hikes come too quickly. With expectations rising of a 50 bip hike at the next FOMC meeting and possibly again at the one after, this is looking like a fast rate hike cycle. Which, if history is any guide, is bad for stocks.
If things do get bad for stocks, it will seem obvious in hindsight:
The relative outperformance of stocks vs. bonds has pushed the equity risk premium down to zero. Which means you’re not getting compensated for the risk you’re currently taking in equities.
What does it mean for crypto?
Crypto is a risk asset so if risk assets go down, crypto will, too. But the recent action in bitcoin feels like it (and maybe all of crypto) is increasingly doing its own thing.
If bitcoin outperforms in the next big selloff, crypto could prove itself to be a hedge against interesting times.
1/ Sports NFTs are tradable collectibles held on the blockchain. Because they are on the blockchain, their scarcity is provable. (Continues) (Thread) — Messari
My first crypto investment: Sept 2017. I've learned many life-changing lessons. Here's a thread breaking down the top-10. (Thread) — CryptoLikeMo
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