Uncategorized

How High Will The Fed Go?

The Fed raised rates by 50 bps this week. The market is thinking that the Fed will raise rates to ~3% and then stop. However, based on historical actions that seems pretty unlikely.

This is a graph of Fed Funds vs. CPI since 2000. Look carefully at what happens when the Fed starts raising rates.

The last two rate hike cycles the Fed hasn’t stopped raising rates until Fed Funds was higher than CPI. i.e. Real Fed Funds was positive.

As you can see, the Fed needs to go a LOT higher than 3% to make the Fed Funds rate have a positive real yield. Yes inflation is likely to moderate some, but it would have to fall under 3% to make 3% Fed Funds cause the same relation.

Bottom line: There is some risk the Fed is going to have to go farther than the market expects which has a lot of risks for asset prices and the overall economy.

By Christopher Schwarz, ago

Risk On, Risk Off

I’ve posted several times the last few months about the market hitting a top. (1/6, 1/25, 1/31, etc.) This is especially true of NASDAQ and Tech (see RIVN for example). Unfortunately, it seems there is probably more pain to go.

There are no good things happening. Growth is slowing. We don’t have any workers left to stimulate growth. The Fed is going to be Uber aggressive. (And you NEVER fight the Fed). There is no more stimmy money coming.

So what I am watching? I view today similar to 2000. We had a bunch of retail investors (and Cathie Wood) come into the market due to zero commissions and push up “sexy” stocks. We had everyone thinking tech growth was unlimited. And thus, the NASDAQ became unhinged to the rest of the market – just like 2000.

Here’s the updated version of the graph I’ve posted many times.

During the tech burst in 2000, the market bottomed a bit after this ratio came back to normal. Even if you view the pre-COVID number as the normal, we have a long way to go from here.

Will the market go straight down? No. But my guess is it will continue to work down until we get to a better equilibrium in this ratio.

By Christopher Schwarz, ago