The Big City
Posted on Sunday, January 30th, 2022
Dread. Such a dark and awful word when you think about it. This past week’s overwhelming emotion was one of dread and the apprehension of what lies ahead. The overriding issue is that I am really not looking forward to my daughter moving out next week. She is going to the big city and I have some apprehension about the crime down there. The bottom line is the fact that I am going to miss her. It has been an absolute joy having her around. The three of us sit by the fire and talk about her plans and share a bottle of wine. The boys join us and share what happened in their week and what is to come. It’s all felt very fulfilling and complete. There is a feeling of completeness when she and the boys are home. It’s the only way to describe it. Just having all three of them in the house has the feeling that everything that is necessary in my life surrounds me. I can truly relax. Everyone is here and safe. The house feels warm and full of life. I am really dreading not having her around.
Wall Street was full of dread last weekend as no one knew what was to come. Overall, it wasn’t so bad. If you didn’t pay attention last week you would think nothing happened. A lot happened. It was a real rollercoaster of a week. The market is still in negative gamma which means that volatility is high as all sorts of players are chasing their tails. Markets go down they sell. Markets go up they buy. There is a long way to go to get back to positive gamma but it is possible. The big question is has the market turned into a bear market. Maybe a bear market is a harsh turn of phrase. More accurately, it looks as though we are in for a 15-18 month grind. Lots of bouncing around, higher volatility and more time spent in negative gamma. Not good for the stress level but not the end of the world either.
We all see the inflation at the pump and at the grocery store. (Diane was just complaining about the price of coffee.) It is part of the Federal Reserve’s dual mandate to make sure that prices are stable. The reality is that all of their powers will have no effect on this inflation. Inflation’s roots lie in the trillions of dollars that Congress shoved into the economy. There are also supply chain related issues. The only inflation that the Fed may end up curing is of the asset valuation kind.
The Fed will attempt to raise rates and cut the balance sheet. It will not work. Each investment bank is attempting to outdo one another in calling for more and more rate hikes in 2022. Goldman Sachs said 4. Then JP Morgan said 6. Bank of America now says 7.
Investment banks called for 4 rate hikes in 2016 – only 1 happened.
Investment banks called for 4 rate hikes in 2019 – only 1 happened. The Fed would go on to cut rates later in 2019. One and done.
We now enter the bizarro world of good news is bad news and bad news is good news. Bad news on the economic front and the market will assume that the Fed will ease off on the rate hikes. Good news and the Fed has the all clear to tighten policy. That economic news includes the stock market. If the stock market is collapsing then the Fed will hold off. If we get back to positive gamma and begin to grind higher then the Fed has the all clear to raise rates and tighten policy. That will keep the market in check for some time.
We are closely watching the yield curve and the possibility of a Fed policy mistake. That mistake would be tightening into an economic slowdown creating a recession. The best indicator of an approaching recession is the yield curve. A recession could lead to a larger downside impact on the S&P 500. The Yield Curve is compressing quickly. The market has priced in 5 rate hikes. Other areas of the market are already pricing in rate CUTS in 2024-2025. Things are happening faster.
We may be in the midst of a 15-18 month trading range as the battle between the bulls and bears rages on. Volatility will increase and the market may struggle as the Yield Curve comes closer to inversion and the Street begins to anticipate a recession. Over time tech will have less of an impact on the broader averages as we rotate from growth to value.
I think we aspire less to foresee the future and more to be a great contingency planner… you can respond very fast to what’s happening because you thought through all the possibilities, – Lloyd Blankfein
A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty. – Winston Churchill
To learn more about us and Blackthorn Asset Management LLC visit our website at www.BlackthornAsset.com .
Disclosure: This blog is informational and is not a recommendation to buy or sell anything. If you are thinking about investing consider the risk. Everyone’s financial situation is different. Consult your financial advisor.