it could end in apathy
disclaimer: this post is simply a verbalization of my thoughts about markets right now & how i think most ppl are interpreting what’s going on. if you signed up for my crypto-specific writing feel free to skip this one (at your own peril)
The Fed’s taken a lot of heat over the last few months for being too slow to scale back its accommodative policy. That heat is not without merit. But it’s irrelevant today and in my view the Fed has now given itself some breathing room. All this means is that it has more flexibility & optionality than it did just ~9 months ago.
Before hiking we had a zero-rate environment just as we now head into a (likely) recession. This could have been devastating as it would have left the Fed with no real options. Smashing through the lower bound of rates would have opened a whole new can of worms. That crisis was avoided. Yay.
But the consensus macro view seems to be that we’re hurtling toward an inevitable recession sometime next year (and maybe ‘24). The obvious oddity is we really haven’t seen the weakness in economic data to suggest things are *that* bad, outside of sustained inflation. This is a huge caveat for a lot of reasons, least of all that consumers despise inflation.
But recessions are defined by increases in unemployment, corporate earnings being squeezed and asset prices coming down (most notably housing). I will leave housing aside for now — it’s clear the housing market is freezing up as the bid/ask spread is far too wide. Anyone paying attention knows the labor market is still too tight. One example of just how weird the environment is is that we added ~4 million jobs during the fake recession of Q1/Q2 this year1. It’s true we’ve seen companies (high-growth tech especially) announce layoffs, but despite what twitter suggests, there is economic activity going on outside of NYC/SF/Miami/Austin.
My 2c is that market participants are grappling with the larger theme of interest rate regime change. We’ve had 3-4 decades of down-only rates which has ripple affects throughout the real (and fake) economy. The lurking sentiment seems to be that if tradif is already off 20-25% and we haven’t even entered a recession, then maybe we deserve some capitulatory event — people seem to be waiting for the other shoe to drop.
For one, deserve is a dangerous word. The market owes you nothing of course. Things will never look worse than at the bottom…obviously. But that’s exactly why bottom-picking is a fool’s game. The likeliest outcome is that the bond market sniffs out the Fed pivot first and we see rates begin to ease ahead of any specific commentary from Jeromey. It’s also plausible that risk-on assets bottom before we even enter a recession — this is a strange idea to come to terms with and it would confuse a lot of participants. Imagine a world in which mid ‘23 sees increasingly poor economic data prints but risk-on assets refuse to break lower (or even grind higher). I wouldn’t dismiss this as a potential outcome.
To be clear though, the inflation battle is the most important fight, bar none. The Fed has to win this now because any pain we feel today will be less destructive than if the Fed backs off too early and has to re-enter later. People will argue around this point but to my mind you need to continue revisiting this idea the longer this apathetic stretch of sideways-down chop lasts. Do not let shiny new narratives obfuscate the foundational challenge.
This was supposed to be quick thoughts & I’ve gone longer than I hoped — will wrap here and table my crypto-related thoughts for later this week…
feel free to @ me in the comments if you need further proof we weren’t in a recession earlier this year (or that the 2 consecutive quarters of negative GDP growth is not a real recession rule)