Tl;dr
Virtually all marco indicators are pointing downward, but our pilots in the Fed are away for the summer and bond markets are confused as shit, so markets have decided to throw a party. Likely to lead to a rather big hangovers, but … no rush, apparently.
Everything - everything - is trending downward (except the market)
Deities of the financial universe (and the Fed) must be going “WTF!” at the markets, which seem to be on a rather spirited bull run.
This despite no signs of inflation slowing down with any haste, us being in a technical recession already, and the constant jawboning from Fed officials about how serious they are about tightening financial conditions - which everyone is seemingly ignoring.
Yet, there are many signs the economy is the titanic, and there are icebergs ahead. And we are all hurtling toward them at the same time.
First, an update to the HOPE framework we’ve been following since April:
H and O are bad. P and E are trending toward bad.
Next, we have 4 of the 6 indicators that are tracked by the NBER to determine a recession-recession (not the Wikipedia variety) decidedly trending downward:
Finally, while oil related inventories are at or near 5-year lows, they seem to be curling up:
Bond market still trying to make up its mind
On one hand, the inversion of the 10Y2Y is real, and getting realer. And hasn’t been this inverted in a while.
Although … not really sure what happened on Aug 2 to make bond yields switch direction:
Apparently all this is because the bond market is choosing “Yes” as the answer to the question: “Will there be rate hikes or rate cuts in 2023?”:
(Source:CME)
This is what it looked like two weeks ago:
So, so indecisive, the bond market is …
So what happens?
The general consensus out there amongst the “macro folks” is we see a bit of a market rally because everyone has been dying for one for a while, and there’s all this powder on the side.
But then reality will catch up at some point soon, markets will correct downward, go through current hedges, VIX will explode when we burn all those hedges and people panic, there is capitulation, and the healing can finally begin. An act that is supposed to play out into 2023.
