Explicitly Fragile

by | Mar 13, 2023

Hats off to the Pivoters.

For much of the past year, they dutifully bought stocks betting that the Fed would start cutting rates.

No matter what FOMC board members said in public, it would seem that Pivoters consistently expected the Fed to relent on its stated rate trajectory. Through their actions, it would appear that they not only correctly estimated that the Fed would balk at the price to fight inflation but that it would balk sooner rather than later.

Well, I think it’s safe to say that sooner could come as early as next week.

That’s when the FOMC reconvenes not to decide how much to hike, but to determine whether to hike, pause, or cut. And I have a hard time seeing the Fed hiking rates in the face of three bank failures in one week.

Perhaps the Pivoters saw an FOMC vulnerable to populist political pressure that favored economic growth over price stability. Maybe they knew the U.S. economy was too fragile to handle 5% interest rates leaving the Fed no option but to relent.

Or, it could be that their business models left them with no other choice but to keep buying stocks.

In other words, Pivoters’ prescience was only implied by their actions.

However you attribute their predictive powers, the Bulls have the ball.

“Higher for longer” stocks will be the name of the game now that the Fed has the cover it needs to keep leverage in the system with cheap money.

Markets may pull back sharply for a few weeks. But systemic fragilities rising to the surface will give the Fed the cover it needs to get back to what it does best – bailing out banks.

Since 2008, the Fed implicitly bailed out banks and boosted markets through perpetual QE.

Today, those bailouts are now explicit. But with the Fed going back to pumping money into the system, Silicon Valley and Wall Street can get back to using leverage to milk more profits out of mediocre ideas.

Which is, after all, what they do best.

Don Yocham, CFA

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