Since January 4, the S&P 500 has fallen 8.3%, three times the manual correction of 10% (a scourge that hits about once every two years in a bull market). The Nasdaq, more defenseless against a rate hike, fell 15% from the highs. And the Russell 2000, a portfolio of small companies, sank 19%, within a percentage point of the bear market. Favorable winds no longer blow, and the Invincible Armada looks dismantled, looking for shelter. For the record, the Fed mounted a combat riot. The battle against inflation has not started. Rates would only rise on March 15. As it did before the taper, the central bank anticipated the tentative scenario, modeled it hyperrealistically. It is that he does not want a tantrum, the chaos that Ben Bernanke experienced in 2013, when he goes into action. With the announced taper there were no problems, and the Fed could even cancel it at the meeting that starts tomorrow. The Stock Market, however, was shipwrecked in the simulator of the increase in rates. In 2013, Bernanke, unleashing the tantrum, backed down. He extended the purchase of bonds and suspended the takeoff maneuver. Only in December 2015 would the fed funds rates move. Of course, Powell’s Fed doesn’t have that luxury. Inflation has risen and is flagrantly offside. But Powell has what Bernanke doesn’t. An economy that recovered vigorously, a thriving demand beyond the fluctuations caused by the waves of covid. The battle against inflation must not be delayed (any longer). On the other hand, the war of nerves, the stress that the Fed manufactured to probe the operating conditions, may well lower its voltage. The bond curve is your main ally. Okay, long rates are up, and they’re worrying. Because, how compatible is consumer inflation of 7% with ten-year rates that closed 2021 at 1.51? It is not surprising that they stamp a new maximum of the cycle: 1.90%, on Wednesday. But they closed at 1.76% and cushioned the anxiety. And while the nominal rate climbed 31 basis points in the last month; the real rate, 44. That is, inflation expectations fell with the rhetoric. How much and how quickly should the Fed touch short rates if bonds are right? Wall Street, in that case, will row against a less hostile current. With a more frontal battle than reality (which suddenly discounts a whole string of rate hikes plus a highly emotional risk premium) it will be possible in time to reestablish the vertical. It would not be a novelty, the turbulence of the tantrum of 2013 was greater than the echo of the first six rate adjustments between 2015 and mid-2018, of the total of eight that were necessary. It is what the Fed seeks; adjust short rates and that the world does not go bankrupt. If inflation soon accuses the transition will not be bloody. After all, its driver, the 2021 fiscal mega-stimulus, was a one-time exercise. If it is challenged, it will strongly carve the fear of stagflation. Which way will fate lean? The positive slope of the bond curve, the rise in real interest rates, and the leading indicators (which predict growth of 3.5% in 2022) do not point to a recession in the making. Since the stock market has plenty of valuation, yes, you can skim it with pleasure, without a return guarantee. It is enough to see how the present value of cryptocurrencies is destroyed when the perception of their usefulness did not change, only the expected conditions of liquidity. There should be no complaint. Those are the rules of the game.
Source From: Ambito
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