Holy Candle Move!

entrenched inflation

Whoa. 

Once you see that MASSIVE candle in the middle of the chart, you cannot unsee it. That’s a brutal one-minute selloff that took place right in the middle of my lunch. I nearly choked on whatever that restaurant was calling a brisket. Let me explain what happened, and why the markets freaked out this afternoon.

Entrenched Inflation

Let’s start with the White House, which issued a statement today. It effectively said that the Federal Reserve needs to take action on inflation. The Biden administration is pushing the Fed to ensure that we don’t see entrenched inflation… 

So, we’ve gone from transitory to entrenched inflation. That’s a BIG word change. And it matters. As the Wall Street Journal explained today, “entrenched inflation would lead to the Fed raising interest rates more, which in turn raises borrowing costs and crimps growth to tame price pressures.”

That would likely fuel a recession in this economy, and signal that the Fed DOESN’T have a good handle on this man made mess. Or, we’ve been largely misled and the so-called “transitory” inflation was just a way to prevent a massive level of purchasing that could’ve exacerbated shortages of goods in the economy and fueled even higher prices. 

If that sounds crazy – remember – we had similar efforts to tame the buying of certain goods at the onset of this crisis to ensure that there wasn’t a run on those vital resources. But today’s efforts by the White House don’t explain the candle that we saw. 

The Hawk and the Bull-ard 

Today, one of the more hawkish members of the Fed Open Market Committee – the team that decides what to do with interest rates – made a very alarming statement about inflation. 

James Bullard – who heads the Fed Bank of St. Louis – called for the Fed to raise interest rates to 1% (the benchmark rate) by July 1. That sent the yields of February Fed funds contracts – set to expire in 18 days – way up. 

And with it, the odds that the central bank increases rates by 25 basis points to 50 basis points show from the low double-digits this week to over 75%. And it’s entirely possible that the Fed moves to raise interest rates on the fly rather AND start to sell off assets from its balance sheet. 

At least that was the speculation today. Reports suggested that the Fed would raise rates as soon as tomorrow. But how is that possible? The Fed is STILL buying bonds right now and engaging in quantitative easing. Seriously – the central bank isn’t going to finish tapering until March 2022. 

So, you can’t raise interest rates and keep buying assets. That’s counter productive. And it would signal to the market that the central bankers are making it up as they go along – and that the issue of inflation is far worse than expected.

The market’s selloff today was quite a reaction. It signals that investors are also VERY worried and recognize that the COVID-19 bubble is set to deflate even faster than many had previously expected. 

What’s Happening with Momentum

Well, the optimism was short-lived. The “All Green” signal that we had yesterday and the wall of speculative capital that entered the markets on Wednesday has dissipated rather quickly in the bottom of the market. We have seen some significant selling pressure at the bottom of the market. 

But mega-cap stocks are also under pressure – and we have to be cautious ahead of next week’s options expiration. People aren’t getting completely out of the “pool” as I noted on Wednesday, but they’re definitely sitting on the wall. For now, my best bets center around those industries that will benefit from higher interest rates. Mainly in the regional and community banking space. 

However, I will caution that any breakneck pace of interest rate hikes could threaten the broader economy and expected growth – which would drag on business and consumer lending. We’re living in interesting times. Remember – cash is a position. And cash is your friend.

Garrett Baldwin
Garrett Baldwin
Garrett Baldwin joined Godesburg Financial Publishing as Chief U.S. Markets Analyst in early 2021. A Johns Hopkins-trained Economist, he’s worked with hedge funds, venture capital firms, angel investors, and economic advisors to the U.S. government. Baldwin specializes in market anomalies and alternative investments. He’s written extensively on momentum, value, insider buying, and other unique strategies that provide investors that elusive edge.
Garrett Baldwin
Garrett Baldwin
Garrett Baldwin joined Godesburg Financial Publishing as Chief U.S. Markets Analyst in early 2021. A Johns Hopkins-trained Economist, he’s worked with hedge funds, venture capital firms, angel investors, and economic advisors to the U.S. government. Baldwin specializes in market anomalies and alternative investments. He’s written extensively on momentum, value, insider buying, and other unique strategies that provide investors that elusive edge.

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