It was probably a good 35 years ago now. I was deep in the forest, too late to start moving back. We would have to spend the night under the stars.
There were three of us. We heard the guttural snorts when whatever it was, had already moved into our camp. We, in our sleeping bags. The big snout, the massive, but almost gentle hands/paws. It was large and powerful. Dark. Too dark to see, that is if I wasn't too afraid to open my eyes. Whatever it was, it sniffed us, and pushed us around a little bit, but didn't hurt any of us. I always thought it to be a bear. Within 15 or 20 minutes, it left us alone.
Decades later. Almost the same spot. No joke. I am not truly alone, but I am way out in front, scouting the terrain. I hear movement. I drop prone. Still. Very still. They came at a gallop. Running from my left to my right, stopping about 75 yards to my front as they pick up my scent, and then off they go. Never to be seen again by this old woodsman, nor by my comrades who were moving as a group. Two albino deer. adults. One, a large powerful-looking buck. The other was somewhat smaller.
Enchanted forest? A warning followed by some kind of reward or reminder? Separated by decades? I still think about what the forest might have been trying to tell me. Why that spot?
Stop. Appreciate. Think about what it is you do, what you pursue every day. Most folks never see the albino deer. I saw two in the same afternoon. Alone. Don't tell me that nature doesn't speak.
The Setup
It was not as if we expected the minutes of the March 16 FOMC policy meeting to pass quietly. The Fed Chair himself had told us that detail would be revealed. Indeed it has. It might be key to note that what was discussed at that policy meeting was what was pertinent three weeks ago. The next policy meeting culminates on May 4, almost a month away. Currently, there appears to be a hawkish consensus after folks such as Lael Brainard, Neel Kashkari and Mary Daly have shaken the dovish inclination from their boots.
The "Fed" or Federal Reserve Bank faces awfully high consumer-level inflation, as do we all. There is an urgency here for sure. Is it the urgency of panic? I can't tell. Are they behind the curve, as so many pundits accuse? It appears that they must feel this way, but I must caution that "they" may not be much further behind than they realistically could have been, for if they had moved earlier, and there had been no war in Europe, surely those same pundits would cast blame for a different reason.
Oh, I don't think the Fed has been perfect to date. While I might have been as slow as they have been on targeting the fed funds rate, readers know full well that I called for, pleaded for an end to the purchase of mortgage-backed securities repeatedly since January 2021. There was no reason to support a market that could support itself, and allowing that side of their quantitative easing program to run for as long as it did was certainly done so in error. Hence, as of last week, the Fed's balance sheet stood at a cool $8.937T.
The Minutes
According to the published minutes of that March meeting, a consensus of Fed officials support the idea of rapidly whittling down that balance sheet through a process referred to as a run-off, which simply means not reinvesting the proceeds from maturing debt securities. FOMC members as a unit, support (or at least they did three weeks ago) the idea of taking three (or more) months to work their "balance sheet taper" to a monthly cap of $95B ($60B Treasuries, $35B MBS), which at the full run-rate would add up to $1.14T per year.
In addition, many (perhaps not a consensus at the time) participants agreed that one or more half point (50 basis point) interest-rate increases at forthcoming meetings would or could be appropriate if inflation remains hot. The idea appears to get the fed funds rate (currently targeted at 0.25% to 0.5%) to "neutral" as quickly as possible.
For the new kids, a neutral rate of interest is the interest rate where the economy is supported at maximum output while not placing downward, or allowing upward pressure on inflation. Most professional economists currently estimate that level to be somewhere in the ballpark of 2.5%. Others believe it has to at least eclipse the annual pace of inflation, which is downright scary. Mind you, the reader is more likely to encounter an albino deer in the forest or shake hands with a friendly sasquatch than that reader is to realize that interest rates have hit neutral territory (which is really a mythical concept) in real time.
Perhaps what I find the most interesting in these minutes is the fact that some Fed officials would consider outright sales of those mortgage-backed securities. While I appreciate that this implies that at least some folks at the FOMC agree with me that this part of their quantitative easing program ran for far too long, and that does make me smile, this action alone, could tighten monetary conditions quite rapidly all by itself.
Not that this would be an incorrect move, just understand that this would slow economic activity on Main Street while mopping up liquidity on Wall Street. I would go to this level of accommodation removal only after failing to control inflation through the roll-off first. In other words. you made that bed, now sleep in it for a while. Confidence surveys show that the economy will slow enough without forcing the issue.
Fun Fact
Including the 25-basis-point increase in the target for the fed funds rate implemented in March, futures markets are pricing in a fed funds rate targeting 2.5% to 2.75% by year's end. Apparently, these markets are trying to price in an effort by the FOMC to reach "neutral" by December. The last time the Fed increased the FFR by as much as 250 basis points in one year was 1994, the year of the Montreal Expos. The tightening cycle that year included one 75-basis-point hike, and the year is still remembered as a bad dream by many middle-aged bond traders.
Necessary? Consumer-level inflation currently runs at its hottest level since 1982, year of the go-go St. Louis Cardinals. so maybe. Unless you can not only stop, but undo the war in Europe and peel back the current surge of Covid through Asia.
Less Fun Fact
As interest rates just begin their climb and monetary conditions just start to tighten, U.S. federal debt stands at $30.368T, or about 126% of GDP. U.S. total debt, which includes state, local, business, household debt-loads as well as the debt of financial institutions and that federal debt... adds up to $89.615T.
Do that math. Total personal debt is $22.847T of that aggregate number. In plain English, the average U.S. citizen currently owes $68.6K in personal obligations and is on the hook for a $91.2K share of the federal debt. I don't even include state and local obligations here as that is different depending on the locale.
I want you to think about that though. Things (markets, day-to-day life) cannot move along as if unimpacted. Tighter monetary conditions will impact discretionary spending, the focus of overall consumer spending, dollar valuations, and valuations for real estate as well as all other risk assets. I don't think Congress gets this, but habitual deficit spending will come under intense scrutiny in coming years, unless we all agree to keep laying the financial responsibility for our actions upon our descendants. How sweet.
Far to Go
Happy Thursday. We already know that Wednesday's child shed tears of woe. The Nasdaq Composite surrendered 2.22% on Wednesday after doing the electric boogaloo from 2 pm ET on. The index gave up the 21-day exponential moving average (EMA), but did appear to find support almost precisely at its 50-day simple moving average (SMA):
The S&P 500 gave up a mere 0.97% for the session, seemingly losing both the 21-day and 200-day lines in the process:
However, the truly frightening performance of the day was turned in by the Dow Transports. In this space 24 hours ago, we wrote to you that the Dow Transports were down 9.9% over five days. After Wednesday's 3.34% drubbing, this index is now -12.9% over six sessions. Dow Theory... oh yeah. That screeching noise that you hear is the steel wheels of the U.S. and global economies slamming on the brakes.
Anyone else watching the small-caps -- the Russell 2000? In this example, the iShares Russell 2000 ETF ( IWM) , readers will see the fund (index) close below all three significant moving averages on Wednesday. Oh joy.
Why are the 21-day EMA, 50-day SMA, and 200-day SMA more significant than other moving averages? Well, that's a matter of opinion and this is my opinion. Seriously though, I have long traded shorter-term off of the 21-day EMA, and I know from experience that risk managers pester portfolio managers more intensely when 50-day and 200-day SMAs are breached.
Incredibly, sifting through the carnage, five of the 11 S&P sector SPDR ETFs did manage to close in the green. Not so incredibly, places one through four were occupied by the four sectors considered to be defensive in nature. Again. The flow of capital that supported these haven-like groups was drawn from Discretionaries ( ( XLY) ), Technology ( ( XLK) ), and Communication Services ( ( XLC) ). Again.
Oh, and trading volumes, which were obviously negative, and decisively so, were indeed heavier on Wednesday. Aggregate trading volumes increased for NYSE and Nasdaq-listed names as well as for S&P 500 and Nasdaq constituent stocks as well. Professional managers did indeed move more inventory on Wednesday than they did on Tuesday.
Bright Spot?
Okay, brighter spot.
The yield curve actually steepened. Huzzah!! While the yield for the U.S. 30-Year Bond remains inverted against that of the 5-Year Note, and the yield of the 10-Year Note remains inverted against those of the 7-, 5-, and 3-Year Notes, the recently un-inverted spread between the yields of the 10-Year and 2-Year expanded, as did the "never in danger of inverting" spread between the 10-Year and 3-month T-Bill. Check this out. While the 10-Year/2-Year did this:
The 10-Year/3-Month spread did this:
Just look at that baby go. I feel better. No, I don't.
Theme From 'Patton' (play it in your head, it's goose bump material)
Earlier this week, we discussed Australian plans to purchase/build missiles and submarines using U.S. contractors. Also earlier this week, Poland signed a deal to purchase 250 M-1 Abrams tanks in an effort to deter Soviet, I mean Russian aggression. The deal is worth a rough $4.75B. Poland plans to deploy the new tanks to units serving near the eastern border of that nation, which is also the eastern flank of the NATO alliance.
The first 28 tanks are scheduled to arrive this year with the balance arriving by 2026. Poland is also set to take delivery of Patriot missile systems and Bayraktar drones this year, and has signed on to the F-35 Lightning (elite-level fighter aircraft) program as well. No word on which variant of the Abrams or the F-35, Poland has signed up for.
The M1 Abrams is manufactured by the General Dynamics Land Systems unit of General Dynamics ( GD) , installed with engines manufactured by Honeywell ( HON) . Both the Patriot missile system and the surface to air missile it fires are manufactured by Raytheon ( RTX) , while the Bayraktar drone is of Turkish origin. The F-35 is obviously a Lockheed Martin ( LMT) product. Principal subcontractors would be Northrop Grumman ( NOC) and the U.K.'s BAE System.
Economics (All Times Eastern)
08:30 - Initial Jobless Claims (Weekly): Expecting 201K, Last 202K.
08:30 - Continuing Claims (Weekly): Last 1.307M.
10:30 - Natural Gas Inventories (Weekly): Last +26B cf.
15:00 - Consumer Credit (Feb): Last $6.84B.
The Fed (All Times Eastern)
09:00 - Speaker: St. Louis Fed Pres. James Bullard.
14:00 - Speaker: Chicago Fed Pres. Charles Evans.
14:00 - Speaker: Atlanta Fed Pres. Raphael Bostic.
16:05 - Speaker: New York Fed Pres. John Williams.
Today's Earnings Highlights (Consensus EPS Expectations)
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