Take a Dive for the Money
Disclaimer
Very short piece highlighting 2 very important pieces of data on the markets - S&P500 and VIX
These are theoretically variably inverse to each other as the VIX is a form of insurance for a possible crash.
Discussion
On SPY, this is over the past few months specifically. I have on ES1 highlighted only major trendlines that pop out for me. These lines show a bounce off a support that isn't catching. Major market developments are negative. A string of big anti-bank headlines poses a possible risk to the highly leveraged and highly hypothetical stock market. Major lockdowns looking more and more prolonged spreading across China. A COVID wave just starting to uptick fiercely on our own shores. Many big tech names showing not just a plateau, but a fall. The first quarter of a negative GDP with all signs pointing to a second coming quickly, giving us a textbook recession. All of which makes sense in a period of rampantly high inflation, more than enough to start a Wage-Cost Spiral. Consumer spending at near all time highs despite personal savings trending aggressively lower, and credit card spending reaching new highs.
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On VIX, I have performed a framework analysis to predict possible outcomes. Recently, VIX has lowered despite SPY lowering, an uptick in massive market risk events, and the lines suggesting this was counter-trend. If VIX has been sold erroneously, i.e. short sold on bad fundamentals, then the original seller disappears, the real VIX market maker steps in at a much higher rate, and now the short seller is on the hook for quite a lot of risk.
There isn't really much more to say here that hasn't been said. The Federal Reserve is lifting rates by .5% next week, which really doesn't seem that much. But when you borrowed hundreds of billions of dollars on a 0% loan, all of a sudden it hits like a ton of bricks. Furthermore, global central banks are preparing to enter a period of quantitative tightening, i.e. less free money all around. However much free capital was liquid before, has been consumed in many big name places. Elon Musk sold over $8 billion in Tesla stock this week. Amazon missed earnings, Netflix lost subscribers, Apple has supply chain issues up the wazoo so whatever price they wanted to throw on the products they have to actually sell can only go as high as the consumer feasibly has the money for. Which considering real wage growth is negative and inflation is at bicentennial highs, ain't that much. The growth trends have been broken. Whatever Bull Market thesis comes next needs to come with an entirely new story.
As much pain a dive in the market is for everyone, there exists a real difference in wealth evaporation between a market crash and a Federal Funds rate hike. In a crash, someone plays counter, someone is taking home a lot of money. In a Federal Funds rate hike, a lot of money is going back to the house. The Federal Funds futures rate curve is enigmatic because major players see the Federal Reserve over-hiking, which is extremely possible. The only difference is they see the Fed over-hiking around 2%, not 4+%. Recent Federal Reserve Governors and FOMC voting board members have made comments in recent times that a Federal Funds rate over neutral (2.5%) might be necessary to crush inflation. There is a Federal Reserve precedent to catch the market when it falls, this is established protocol. If major market participants believe that a crash now towards the "Fed Put" line at 3600 will stall, or prevent major rate hikes, it would be in their best interest to hit that point soon. While a fancy fairytale this scenario might be, it is a logical pathway for all parties to entertain and pursue when the counter is a potential break of the system. The amount of real de-leveraging of a sustained high interest rate would cause serious damage to asset valuations, both hard and soft. The more money the Federal Reserve demands from banks and other counterparties, the more money needs to get sucked out of whatever place it can. The banks loan rates to businesses, small and large alike, are fixed around various rates, that are all fixed to the Federal Funds rate. If more and more parties within the system need to pay more and more money, it will cause a squeeze in every place that can sustain and cause businesses to fall as consumers are suffocated.
This next paragraph is from a piece I am currently writing on something else, but I believe it fits here:
Monetary inflation is just one element to real inflation. 'Cost-push' is the phrase many use to describe price increases derived from the cost to make the good or cost to do the service. Company margins are more an element of monetary inflation, but often are in flux with cost-push inflationary pressures. If the cost of steel goes up, the cost of anything made from that steel will increase. As every step between that steel and the finished good increases, that original inflationary trigger compounds. A simple service to analyze, a dog walker. The dog walker needs work-appropriate clothing, i.e. sneakers, transportation, a mobile device, a home, at least 10 meals a week, healthcare, savings, and spare cash for entertainment. Any increase in any one of those costs will lead to an increase in cost of service. The way that individual might have margins between any single cost-to-price increase, a company would as well. When creating a plan to lower inflationary impulses, or to prevent inflation altogether, that plan must account for everything. Monetary inflation can be accounted for, and corrected with a simple series of policies limiting potential causes. Cost-push is much more complex and deals with everything, in every supply chain. This analyst spends more time than they'd care to admit trying to delineate some master equation for the balance of life. There is no perfection, but only the pursuit of.
The Federal Reserve fueled inflation from the Monetary side, kicking off a disequilibrium event, and likely starting a serious Wage-Cost Cycle. Whatever happens next, it will be completely unique and beautiful in it's own terribly scary way.
Disclaimer
This is in no way, shape or form, fluid and function, an analytical, qualitative or intelligent compte rendu. The function of this essay is the maddening diatribe of a curious mind, and how this one manages micro- and macro-economic data for a critical investigation into the micro- and macro-economic world. This text is not suitable for direct consumption, and should never be used as a primary or secondary source. The contents of this text are often illogical and offensive, and great care should be given to the reader's personal qualifications and senses. This text is delivered on TradingView, where the userbase is expected to have a level of financial and investigative understanding that would enable them to query appropriate thoughts and abdicate nonsense to the void. May whatever sovereign and omnipotent being you believe in, guide you through this.