There’s been a ton of talk lately about the Fed taking a more hawkish stance in policy. Bears are shaking their heads as the market quickly gained back the majority of their losses from the beginning of the year.
The Fed knows that inflation is an issue, but their moves so far, and even their projected moves for the foreseeable future, are far too weak to break inflation’s back.
Here’s the key why the bears are wrong: money is cheaper than its ever been in history. The nominal interest rate doesn’t matter, what matters is the difference between interest rates and inflation. Right now, the relationship is flipped, with interest rates being much lower than inflation. Theoretically, if an investor can borrow money at 5% and buy an asset that’s going to appreciate at the current 7.5% inflation rate, he would be silly not to load up on as much debt as possible and earn the 2.5% difference.
Just about every forecast is for inflation to worsen in the near term. Meanwhile, the Fed is using a 5 gallon bucket to try to remove liquidity from the ocean. Bulls are gonna win until the Fed makes a Volcker type move, then there will be a violent move to the downside as everyone unloads assets to pay off their loans as the assets are no longer appreciating more than interest rates. I don’t think the Fed has the political backbone to make this move until at least after the midterms. Rainbows and unicorns until at least November.
TLDR: Bears fukt in the short term
What happened to the stock market in 1987? t.co/dNFYuuDiWO pic.twitter.com/T8rYVIuoL2
— Endless Capital (@endless_frank) March 28, 2022
Have we ever seen a yield curve this flat before? pic.twitter.com/SPpauybH6S
— Jeremy (@jbergASU) March 28, 2022
🇺🇸 Traders expect 200bps more #Fed tightening by year-end as Biden will add maximum pressure to curb #inflation ahead of midterms.
*The move is likely to push the U.S. economy into #recession, which should result in rate cuts later. pic.twitter.com/wB5Dxy3fmQ
— Christophe Barraud🛢 (@C_Barraud) March 26, 2022
U.S. Mortgage Rates Soar Near 5%