Bring the Pain

 

This week is going to be a short post with hardly any commentary from me. I still wanted to share some of the goods from the week. Bond holders are currently feeling the pain most. Jerome Powell had second thoughts on just how aggressive the Fed was going to be. Now, he says they're done just acting tough, but ready to fight, inflation that is.

Since I haven't been able to dive into this, I thought I'd share some commentary from one of my colleagues, David French.

As the Federal Reserve is ready to embark on an expected aggressive series of tightening moves, how does the rates market generally respond? I went back to 2017 and 2018 when the Fed tightened 3 and 5 times (total of 8) over 2 years. How did rates respond? Looking below, the 2y-10y spread (Purple line) reversed its steepening and began a long flattening trend that continued all the way through the rate hikes and stopping when the last one was done. This provides a view that the yield curve is very responsive in a concurrent fashion with Fed policy. 10yr yields (Green Line) however, look very anticipatory and rose ahead of the first tightening move and put in the highs at that time. When the fed started again in 2018, 10s rose in yield again but most the damage was done before the last 3 hikes.10s began rallying well before the final rate hike.

What about stocks? Shifting to DataStream, I am looking at Fed Funds Effective, S&P 500 Q% change and US CPI Annual% change with Recession bands. Looking back nearly 40 years, it’s hard to find a time when stocks reacted poorly to a Fed tightening. Perhaps because that is usually due to an economy overheating. It’s only a recession and Fed easing that is associated with negative equity performance.

But this might not be like recent, or even 30 year old history. We have not seen inflation numbers like this since Chairmans Burns and Volker back in the 1970s and early 80s when we had double digit inflation, a Fed Funds rate over 20%, and we issued a 30yr Long Bond with a 14% coupon.

Early days to see how this plays out but we have a generation of traders and Portfolio Managers who will need to start consulting history books...or a reputable firm with reliable historical data.

I thought that was good enough to steal word for word.

Here’s the weekly performance numbers. Nat Gas & Crude are still a major story. 

Best of the Week

I learned a lot on how Ukraine is using crypto to help fight back versus the Russian invasion. Alex talked about how much more versatility crypto has provided for them.

Crypto in Ukraine | Alex Bornyakov, Deputy Minister of Digital Transformation of Ukraine - Listening time: 57 minutes

Best of the Rest

I’ve been looking at the impact of rising rates on housing a bit. I didn’t have the time over the weekend to do much more, but these were a few of the links that sent me off into some research. Rents have risen along with home prices and now the average mortgage is going to take a bit of a bump. As we see rates rise, it should have a direct impact on the buying power of those in the housing market.

Mortgage Rates Moving Closer to 5%

The average U.S. rent has risen 18% over the last five years

Housing is a leading indicator

New highs for 30y US mortgage rate: 4.5%

Larry talks through a bunch of the implications the war in Ukraine is going to have on global finance. Most notably is the end of globalization as we know it. I think he’s got a strong probability of being right on this.

LARRY FINK’S 2022 CHAIRMAN’S LETTER

Nice explanations here if you’re interested in learning more about what DAO means. Alexander Taub, co-founder of Upstream, joined The Pomp Podcast.

What The Hell Is A DAO?! w/ Alexander Taub - Listening time: 28 minutes

This post from Kris has two parts. The first one sets up the second, but it’s still a good story on how things worked from the days of the past. The second part is where he gets deep into hedging. I’ll admit some of this was over my head and will require a second read while not watching the NCAA tournament. Either way, it’s still a good post.

If You Make Money Every Day, You’re Not Maximizing

One for the Road

Scott Galloway puts some of the numbers around suspect wealth finding its way into global economies. He opens with a good one too. “The UN estimates $2T in proceeds from crime are laundered into the legitimate economy every year.” There’s a ton more here.

How Russian Oligarchs Stow Away Their Money in the US and UK

Thanks for reading. Have an excellent week.

Michael