More Stable Long Term Yields Can Help Tech Recover.
TA: QQQ is at a key support level right now. Bears can break Tech's upward channel; this will see QQQ go down to 274. However, Bulls are at a key 50% retracement area and still resides in a bullish channel.
Fundamental: The last time the Fed began raising rates and reducing the balance sheet, equity markets continued moving up after, some initial fear. The fed never claims to tighten into a weakening economy. Our economy now warrants a higher fed funds rate! Employment is looking good. Inflation ran hot in 2021. The next logical step is to tighten... We have had 3 very large stimulus bills signed into law since Covid hit. With the fed still providing liquidity to markets, there is no reason markets cannot sustain a rise in the short end of the curve. Additionally, the long end of the curve remains in a long term down trend. The US10Y is facing tough resistance at 10% potentially giving Tech a chance to recover. Also, the fed is pushing inflation expectations upwards while looking to keep rates low leading to stimulative low real interest rates.
The Fed's Dilemma (The Fed's Path Forward)
Nobody likes high inflation. The only cure is higher rates. Higher rates bring down asset prices. Lower Asset prices makes people feel less poor and slows economic growth.
There is grand debate of what is causing price inflation. Is it cause by the money printer or covid related supply issues? Price Inflation has mainly been seen in goods that depend on a supply chain. Cars, semiconductor, energy have appreciated unlike gold and silver. The fed is letting inflation run hot because they need a 2% inflation average. The fed is preparing for the net recession. They need to raise the fed funds rates now so they can lower it during the recession to stimulate the economy. Following the same logic, the fed needs inflation to run hot now in order to offset the upcoming deflationary downturn. When inflation expectations fall, real interest rates rise. (Calculating Real Interest Rate Example: The Inflation expectation is 7% and Rates are at 2%. 2%-7%= -5% real interest rate). The fed regains ammo by increasing the fed funds rate. Money from stimulus was spent when supply chains were broken due to a raging virus. The reduced supply led to higher prices. Supply chains are still facing headwinds and their recovery will be a slow process. However, once Supply chains recover we will start to see disinflation. Eventually as inventory rises, prices will stop going up (disinflation) leading to lower inflation expectations and a higher real interest rate. Higher real interest rates lead to tighter conditions. So to be more stimulative, the fed will want to lower real interest rates by keeping inflation expectations high. The most stimulative scenario the fed can hope for is a high inflation expectation and low rates. Example: inflation expectation is 5% and rates are 0%. That is a real interest rate of -5% which is very stimulative!!! That is why the fed is trying to drive up inflation expectation with a hawkish message. If inflation expectation stays at 5% and the fed raises rates to 3%, the real interest rate will be -2% less stimulative than if the fed kept rates at zero. The fed is looking to get inflation expectations as high as possible while keeping real rates low. Tech loves low real rates. Now this strategy works all fine and dandy until the reigning heavyweight champion is summoned: an inverted yield curve. Every time the yield curve inverts a recession occurs. The yield curve is inverting faster than last time.
In the era of Quantitative Easing that followed the financial crisis, the only recovery we truly have seen is a WallStreet recovery. Economists call these recoveries economic expansions. With increasing GDP growth, increasing wages, rising yields, job growth, etc. they are certainly right. However, success in these measures does not correlate to a more financially successful consumer. Covid created a new market cycle forcing the fed to lower rates back to zero. The Fed bases its policy off of boom-bust cycles. The boom occurs when monetary policy is accommodative.Lowering interest rates is the fed’s most useful weapon however, when nominal rates reached zero the fed turned to QE, unleashing a beast no one quite understands. QE’s main aim is is to induce inflation by expanding credit and providing liquidity. Prior to 2008 the feds balance sheet was at ~$750B. It now stands at ~$7T after 4 phases of QE. It took the Fed 7 years (2008- 2015) to raise interest rates from zero. Then only two years later as the balance sheet started to unwind: Trump Called for Fed’s ‘Bonehead’ to Slash Interest Rates Below Zero. Now here we are again the fed funds rate in March are set to raise from zero and we are going to unwind the balance starting in June. But, The times they are a changing however and the biggest problem markets face now is Inflation. The job market is tight, inflation is raging and economic growth is above trend. The feds next move will certainly be to tighten. However, they will look to raise the inflation expectation with a hawkish stance while rates remain low.
The fed has been battling deflation, low rates and a slowing economy for years. Government QE couldn’t even spur inflation from 2009-2019. It was only when the Covid recession hit the government needed to support the economy and provide stimulus. Stimulus came in the form of monetary support, expansionary fiscal policy (deficit spending) and QE. When Covid hit economic performance tanked until the CARES Act was signed. A $2.2 trillion economic stimulus bill was used to bail the economy out of the covid induced slum. In December 20020 another bill followed called the Consolidated Appropriations Act ($2.3 trillion). This bill provided stimulus relief and an Omnibus spending bill. Then, when Biden came into office he signed the American Rescue Plan Act of 2021 ($1.9 trillion) which was used to speed up the economies recoveries. Biden plans on releasing a revised Build Back Better Act in 2022. However, this bill will not be as robust as its predecessors. An accommodative fed along with stimulus has created an economic recovery. However, looking forward we are not expecting another 2 trillion of stimulus. A slowing economy is guaranteed. Q4 2021 growth was at 6.3% while, Q4 2022 is forecasted to be around 2.5%. we are slowing from extreme levels but there is no reason we can’t handle rate hikes and runoffs like this. Metrics measuring economic conditions and the job market are positive. The housing market continues to be strong. State and Local governments have plenty of cash from ARP bill and will look to further increase employment. We will be seeing stimulus in the form on municipal support rather than direct support in 2022. Illinois a bankrupt state just a couple years ago got their bonds upgraded!
Inflation has been sticky. Powell was forced to retire transitory as, inflation persists. Powell was facing pressure from congress, the people, everyone to acknowledge inflation. He finally did. Now he must push forward an inflation narrative to increase inflation expectations The fed will continue to stay behind the curve. Before the fed acts, they will need to ensure the market has priced in what the fed is planning to do. In other words, they want the market to price in a high inflation expectation. They can’t go against the market. The fed already has its hands full managing the inner plumbing of a trillion dollar balance sheet. The fed does not want to be to eager to raise rates because they only have control of the policy rate or the fedsfundrate; they can't affect the long end. The yield on 10 year and 30 year securities are very low for a stimulus ridden economy experiencing 7% inflation. The economy will slow from elevated levels which is expected recovering from the covid bottom. With that being said the market have already priced in 5 rate hikes. The markets always tends to overshoot fed expectations as long term rates continue to fall.
Notice how increases in US02Y and FedFundsRate don't cause meaningful uptrends in US10Y or US30Y. The short end of the curve will always increase more than the long end.
The last time Short Term Rates rose, the stock market rose with it!!
Thank you for reading.
Fundamental: The last time the Fed began raising rates and reducing the balance sheet, equity markets continued moving up after, some initial fear. The fed never claims to tighten into a weakening economy. Our economy now warrants a higher fed funds rate! Employment is looking good. Inflation ran hot in 2021. The next logical step is to tighten... We have had 3 very large stimulus bills signed into law since Covid hit. With the fed still providing liquidity to markets, there is no reason markets cannot sustain a rise in the short end of the curve. Additionally, the long end of the curve remains in a long term down trend. The US10Y is facing tough resistance at 10% potentially giving Tech a chance to recover. Also, the fed is pushing inflation expectations upwards while looking to keep rates low leading to stimulative low real interest rates.
The Fed's Dilemma (The Fed's Path Forward)
Nobody likes high inflation. The only cure is higher rates. Higher rates bring down asset prices. Lower Asset prices makes people feel less poor and slows economic growth.
There is grand debate of what is causing price inflation. Is it cause by the money printer or covid related supply issues? Price Inflation has mainly been seen in goods that depend on a supply chain. Cars, semiconductor, energy have appreciated unlike gold and silver. The fed is letting inflation run hot because they need a 2% inflation average. The fed is preparing for the net recession. They need to raise the fed funds rates now so they can lower it during the recession to stimulate the economy. Following the same logic, the fed needs inflation to run hot now in order to offset the upcoming deflationary downturn. When inflation expectations fall, real interest rates rise. (Calculating Real Interest Rate Example: The Inflation expectation is 7% and Rates are at 2%. 2%-7%= -5% real interest rate). The fed regains ammo by increasing the fed funds rate. Money from stimulus was spent when supply chains were broken due to a raging virus. The reduced supply led to higher prices. Supply chains are still facing headwinds and their recovery will be a slow process. However, once Supply chains recover we will start to see disinflation. Eventually as inventory rises, prices will stop going up (disinflation) leading to lower inflation expectations and a higher real interest rate. Higher real interest rates lead to tighter conditions. So to be more stimulative, the fed will want to lower real interest rates by keeping inflation expectations high. The most stimulative scenario the fed can hope for is a high inflation expectation and low rates. Example: inflation expectation is 5% and rates are 0%. That is a real interest rate of -5% which is very stimulative!!! That is why the fed is trying to drive up inflation expectation with a hawkish message. If inflation expectation stays at 5% and the fed raises rates to 3%, the real interest rate will be -2% less stimulative than if the fed kept rates at zero. The fed is looking to get inflation expectations as high as possible while keeping real rates low. Tech loves low real rates. Now this strategy works all fine and dandy until the reigning heavyweight champion is summoned: an inverted yield curve. Every time the yield curve inverts a recession occurs. The yield curve is inverting faster than last time.
In the era of Quantitative Easing that followed the financial crisis, the only recovery we truly have seen is a WallStreet recovery. Economists call these recoveries economic expansions. With increasing GDP growth, increasing wages, rising yields, job growth, etc. they are certainly right. However, success in these measures does not correlate to a more financially successful consumer. Covid created a new market cycle forcing the fed to lower rates back to zero. The Fed bases its policy off of boom-bust cycles. The boom occurs when monetary policy is accommodative.Lowering interest rates is the fed’s most useful weapon however, when nominal rates reached zero the fed turned to QE, unleashing a beast no one quite understands. QE’s main aim is is to induce inflation by expanding credit and providing liquidity. Prior to 2008 the feds balance sheet was at ~$750B. It now stands at ~$7T after 4 phases of QE. It took the Fed 7 years (2008- 2015) to raise interest rates from zero. Then only two years later as the balance sheet started to unwind: Trump Called for Fed’s ‘Bonehead’ to Slash Interest Rates Below Zero. Now here we are again the fed funds rate in March are set to raise from zero and we are going to unwind the balance starting in June. But, The times they are a changing however and the biggest problem markets face now is Inflation. The job market is tight, inflation is raging and economic growth is above trend. The feds next move will certainly be to tighten. However, they will look to raise the inflation expectation with a hawkish stance while rates remain low.
The fed has been battling deflation, low rates and a slowing economy for years. Government QE couldn’t even spur inflation from 2009-2019. It was only when the Covid recession hit the government needed to support the economy and provide stimulus. Stimulus came in the form of monetary support, expansionary fiscal policy (deficit spending) and QE. When Covid hit economic performance tanked until the CARES Act was signed. A $2.2 trillion economic stimulus bill was used to bail the economy out of the covid induced slum. In December 20020 another bill followed called the Consolidated Appropriations Act ($2.3 trillion). This bill provided stimulus relief and an Omnibus spending bill. Then, when Biden came into office he signed the American Rescue Plan Act of 2021 ($1.9 trillion) which was used to speed up the economies recoveries. Biden plans on releasing a revised Build Back Better Act in 2022. However, this bill will not be as robust as its predecessors. An accommodative fed along with stimulus has created an economic recovery. However, looking forward we are not expecting another 2 trillion of stimulus. A slowing economy is guaranteed. Q4 2021 growth was at 6.3% while, Q4 2022 is forecasted to be around 2.5%. we are slowing from extreme levels but there is no reason we can’t handle rate hikes and runoffs like this. Metrics measuring economic conditions and the job market are positive. The housing market continues to be strong. State and Local governments have plenty of cash from ARP bill and will look to further increase employment. We will be seeing stimulus in the form on municipal support rather than direct support in 2022. Illinois a bankrupt state just a couple years ago got their bonds upgraded!
Inflation has been sticky. Powell was forced to retire transitory as, inflation persists. Powell was facing pressure from congress, the people, everyone to acknowledge inflation. He finally did. Now he must push forward an inflation narrative to increase inflation expectations The fed will continue to stay behind the curve. Before the fed acts, they will need to ensure the market has priced in what the fed is planning to do. In other words, they want the market to price in a high inflation expectation. They can’t go against the market. The fed already has its hands full managing the inner plumbing of a trillion dollar balance sheet. The fed does not want to be to eager to raise rates because they only have control of the policy rate or the fedsfundrate; they can't affect the long end. The yield on 10 year and 30 year securities are very low for a stimulus ridden economy experiencing 7% inflation. The economy will slow from elevated levels which is expected recovering from the covid bottom. With that being said the market have already priced in 5 rate hikes. The markets always tends to overshoot fed expectations as long term rates continue to fall.
Notice how increases in US02Y and FedFundsRate don't cause meaningful uptrends in US10Y or US30Y. The short end of the curve will always increase more than the long end.
The last time Short Term Rates rose, the stock market rose with it!!
Thank you for reading.
Comment:
***TYPO Fundamental Paragraph: The US10Y is facing tough resistance at 2% potentially giving Tech a chance to recover.
Comment:
US10Y headed to 2.15%. Still in a very heavy resistance area.
Comment:
If the nasdaq channel breaks downward. 307 next
Comment:
I am still looking for original target of 405 retest of highs!