Very simply, their #1 job is to manage inflation and they failed. They hiked 1 year too late and started too slowly. Inflation right now is pervasive and sticky. December’s numbers were quietly revised up and January we all know. Indicators saying February will be even hotter. Add in the Biden admin drawing down the SPR to its lowest level in 40 years with the annual rise in Oil/RBOB upon us which will only drive inflation up. So what now?
Much to popular belief, the tech bubble burst in 2001 because of yields. Once the 2-year reaches a certain yield, firms will move money for that return and sit easy. In other words, we call that “paid to wait.” We can see it playing out now. Add that credit usage is maxed out (good earnings/poor guidance scenario we are seeing now). Here is a breakdown:
1) Yields will continue to rise the next 1-2 months. Inflation numbers move up.
2) Companies continue to lower guidance.
3) Now this is where it’s important: WATCH the 2 year. High 5s/low 6s is concerning.
4) Outflow of equities into fixed income.
5) Major pain in indexes. Bearish targets will be hit here with no QE to save it.
Can’t put specific times to this but the 2 year is king. Jpow and the fed failed and here we are. Feel free to disagree but I guarantee you this is the discussion behind closed doors on Wall Street.
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