Sunday, May 8, 2022

The Fed, Plus Risk On/Off Mode

 First, about the Fed.

I believe it is very, very early in its interest rate battle against inflation. The chart below shows that it has taken only baby steps in tightening: look at how drastically the blue and red lines diverge, mostly because the FedFunds rate I still so very low versus inflation, current and expected. So, there is much more upside to come.

Second, on risk appetite.

Spreads between junk bonds and Treasurys are still very near historical lows - unrealistically low, in my opinion. I believe investors  are still expecting (hoping) that there won’t be a full blown-out recession in the near future, so they’re still pretty blas√© about bankruptcy risk.

Putting the two together:

The Fed still has a long way to go in raising rates, meaning things will get much more challenging for the economy in the near/medium term. Investors don’t seem to appreciate this risk, so they’re still pretty much on Risk On mode - dangerously so.

(Both charts come from Yardeni Research. Their interpretation is mine alone.)


  1. Replies
    1. I think this will end up as nemo bono (no one benefits) ;)

    2. laugh... if no one benefits from raising interest rates... it likely won't happen? =)

      still, I think higher interest rates are good for the U.S. over the long term... problem is my list of people that benefit from it in the short term, is very short... Hell. Full stop. =).

  2. Since this is Hell's house, I will try to be a good guest eh... =)

    For stability, the U.S. needs a way to withdraw a large quantity of its money supply; but this is going to hurt everyone like hell. What we need is a politically acceptable story for withdrawing the money supply, which everyone can buy... and no, graphs of M0, M3 and money supply means inflation, etc, etc,... is not a politically acceptable story.

    Unfortunately, the only story I can think of is a war... call to sacrifice... increase taxes... =(

    1. Agree. The only way to untie this Gordian knot is by using a sword.

    2. sighz... can't we think of something else?

      I know Hell is thinking of Vocker... but the thing is Vocker lived in a era when the elite still had prestige... they could put out a call to sacrifice by basically saying trust me... well, all that trust has been squandered... now the masses want to think for themselves.... problem is that they can't think... oops... =)

    3. btw,... the May 11 anon is chicken... new comp. =)

    4. I agree, charts and statistics are way above most peoples' heads - to make their point politicians always appeal to basic sentiments: essentially, fear and greed, yin and yang. Thankfully, this is not a political blog :)