I can’t emphasize enough the ramifications for what I believe is a historic reversal of speculative finance
Our system faces a serious inflation problem. At the same time, Market Structure and systemic fragilities simply cannot tolerate a significant tightening cycle. It is a Quagmire. The writing’s on the wall: faltering markets will spur a major tightening of financial conditions, while consumer inflation remains elevated.
Everything points to powerful inflationary dynamics and a Federal Reserve hopelessly “behind the curve.” The market is now pricing in a 2.86% Fed funds rate at the FOMC’s December 14th meeting. Moreover, the Fed is expected to soon commence its $95 billion monthly balance sheet reduction (“QT”).
I can’t see how this adjustment proceeds smoothly. A panicked run – similar to what was materializing in March 2020 – is a distinct possibility. Credit is inherently unstable. This has been a deeply-flawed multi-decade experiment.
This implies a major cycle inflection point for the bond market, now faced both with a secular upturn in inflation and diminished QE prospects. And a secular jump in Treasury yields would demand a long overdue downward valuation adjustment for stocks, corporate Credit and other financial assets.
The previous cycle enjoyed incredible staying power, and it will be difficult for most to accept that such a rewarding era has run its course.
The US stock market is always last to know…
Excellent run down of how each bubble became larger and more dangerous. And how perceived financial wealth will have an unavoidable reckoning soon.
At this point, the Fed would have to dramatically tighten financial conditions to reset inflation expectations. But such a move would collapse fragile Bubbles. Going forward, de-risking will require more selling of securities holdings, rather than simply buying cheap hedges.
Returning to 2000/07 valuations requires a 40% drop in the US stock index; returning to above mean value 100% of GDP would require a 70% drop