Risk On or Off That is the Question

Technical charts

We hope everyone had a relaxing Thanksgiving holiday and enjoyed time with family and friends. We also hope you took some time to enjoy life a little, maybe over indulged in an extra helping of turkey or dessert or sipped on a little belly warmer to wash everything down, whatever it was, we all need to take a step back and soak up all the free time in a way that relaxes both our minds and our bodies. Being well rested is underestimated when it comes to being on your best game and putting one in the best position to succeed.

Alright back to the markets, yesterday saw FRB talking heads Williams and Bullard. (FRB = Federal Reserve Board) The FEDs ability to try to jawbone markets into thinking a certain way is second to none and as we have stated before, we know they can’t keep the rate hiking path much longer and even more important, they cannot reduce their balance sheet without destroying leverage and credit. So what did these two have to say, well here is a condensed version:

“More Work to do on lowering inflation, rates need to go higher to bring down inflation, will need to raise rates further, Fed wants to be true to 2% inflation target, US economy at greater risk of shock that could cause recession, inflation risks still to upside.”

So you can see from those statements a little bit of hawkishness but in reality, many market participants believe they have gone to far, too fast. I believe Bullard set the tone of reality however when he stated this:

“If we get rates sufficiently restrictive stance by end of Q1 2023 and HOLD, could have conditions for inflation to subside in reasonable time frame”

We feel this is more likely and we actually believe December will be their last rate hike as we cannot imagine the redemptions coming in Hedge Fund and mutual fund land come Q4 after the abysmal returns are truly absorbed by the masses. This will lead in our opinion to a disastrous Q1 performance out of equities driving them to new lows and forcing the FED to abandon their rate hikes and start leaning toward cutting rates by the end of Q2 2023. The FRB cannot ignore the inverted yield curves which, globally are telling us that trouble is on the horizon and that the path is beset from all sides via global central bank error in policy. Not only have the rate hikes been to high too fast, but over the last 2 decades this is the excess of mirage wealth that they continue to cling too. Eventually the imbalance gets rectified and the US Govt 10Y/FFs curve is telling us that if the FED doesn’t watch it, they may cause an economic downturn they cannot buy themselves out of: