Did you feel the judder as the Fed warned rates will rise?

Blain’s Morning Porridge 17 June 2021: Did you feel the judder as the Fed warned rates will rise?

“Talking about talking about a meeting…”

This morning: Fed Head Jerome Powell set the market wagging y’day, triggering a mini-taper tantrum in bonds and stocks when he revealed no immediate rate hike but the possibility/likelihood of 2 rate rises in 2023. Bonds and Stocks fell. Bonds are unlikely to get much better in coming months – unless we see a market wobble that forces Central Banks to intervene, or something that creates a flash flight to quality. We are now in new market phase – the correlation between bonds and equities is looking vulnerable to a reversal when the free money that’s fed the rally since 2010 dries up!

This is getting….. “interesting”.

Yesterday’s Fed Meeting was a Significant Moment. Did you feel the judder? Did you spot the startled pigeons as the Hawks suddenly appeared high above them?

While global markets continue to fret about theoretical inflation and taper policies, Jerome Powell laid it out fairly clearly yesterday – once you cut through the noise. The Fed is discussing beginning discussions on trimming bond purchases, while the latest Fed outlook includes upward revisions to inflation and interest rates… It won’t happen, today.. said Powell, but it will happen when “further progress” is seen in employment and inflation…

(Meanwhile, I am sending a NSS award to UK Chancellor Rishi Sunak for spotting “as interest rates and inflation change, that has an impact on our debt…” Good to see he learnt something at Goldman then…)

None of yesterday’s Fed noise is good news for markets. After the US 10-year bond reversed its recent rally as its yield rose to 1.6%, its clear bond holders around the globe are nervous. If bond holders are nervous, then everyone else should be at the “reaching for new pants “stage.

If bonds sneeze, global markets could well be rushed into the critical care ward!

The brutal reality of these distorted, believe anything markets has been the ongoing distortion in relative values caused by ultra-low accommodative interest rates and QE – undo these, and the whole sorry farrago the current market is founded on could tumble into chaos!

Excellent. I love a bit of volatility and a dose of nice chaotic opportunity…

The game breaks down if interest rates rise. That will undo the cosy assumption Central Banks are going to keep fuelling the financial asset rally with essentially free money. That’s why bonds and equities have been so closely correlated in recent years  – equities have gone up because money is free. It’s distorted the price of everything – and listening to the Fed it now it feels like the bill is finally coming due.

The more we hear about tapering bond purchases, raising interest rates, or soaring employment, the more nervous markets will become. Getting ahead of where central banks are thinking – understanding how recovery is creating real jobs or not, or exactly how the inflation outlook is developing; real inflation vs supply chain glitches – is going to be critical.

The other side of this equation is equally important. Central Banks, and even governments, understand how complicit they have been in the inflation of financial assets. They know how vulnerable markets are. They know that a market collapse will cause massive Tsunamis of doubt and crush recovering economic confidence. In short – they understand the thin line they have created by distorting markets…

Balance just how much Central Banks want to normalise interest rates and address inflation and jobs, against just how much they have hamstrung themselves into maintaining a massively inflated and overpriced equity market….

Tough… eh? But a great market game to play…

Take a look at any current market chart – and its clear we’ve peaked in bonds, commodities, property and equities. Markets are in toppy mode. They will probably wander sideways through the summer, giving time for investors to think, consider and plan how to hedge against a chaotic unwind moment later this year if it becomes clearer higher-rates are probably coming. This is now a very, very dangerous moment for markets as they gauge how much more or less Central Banks will do.

It could look like a rebalancing as investors switch out of speculative stocks into fundamentals and safety trades – but it could equally well turn into a rout.

Or, it might not happen at all…  Personally… I’m hedging both ways… rebalancing with a bit more in gold and keeping – despite my comments on bonds – a bond position for the flight to quality moment.

It all depends on bonds… It always does. What chance global bonds tighten again? Only if pandemic recovery proves hollow, or we see a disastrous spike in job losses if/when SMEs start to collapse, or, perhaps,  something more fundamentally destabilising– like it all going off in the seas around Taiwan… which seems to be a rising risk this morning as swarms of PLA jets buzz a reef in the contested seas..

Meanwhile.. in a galaxy far far away

I received some very interesting answers to the question I asked yesterday: “what kind of market no-see-um could trigger a full on crash or sell off?”.

One reader suggested a major celebrity endorsing calls for even more draconian climate change penalties for corporates and nations not meeting renewable goals could set market a’tremble… which set me thinking…

What if a celebrity were to do and say something really clever? How about:

“I’m going to use my fame and money to buy and dig coal mines. We will burn that coal to produce energy to make hydrogen – a create a new and vibrant hydrogen based economy across Africa. This will create opportunity and jobs to lift millions out of poverty, creating a new cleaner environment, while addressing wealth equality across the continent. Burning coal will create short term carbon emissions – which we will seek to mitigate by using clean coal technologies to scrub flue gasses and sequester Co2.

In the medium term, the additional CO2 load will be more than balanced by the swift transformation of African energy and transport moving a new, fairer economy towards a clean future. This will give us the time and opportunity to ensure the global move towards a green carbon neutral future does not come at the expense of poorer nations.”

Now… that could be interesting…

Five Things to Read This Morning

FT – The Fed Nailed it

BBerg – Who’s Up for Managing a $1 Trillion Pension Fund?

WSJ – Apple Struggles in Push to Make Healthcare Its Greatest Legacy

WSJ – Wall Street Banks Warn Their Trading Boom is Over

Torygraph – The GB News Boycott is a turning point: big business must end its wokery!

Out of time and back to the day job

Bill Blain

Shard Capital