The Fed and US administration may have lost the confidence game, as rapid rate hikes negatively impact the real economy and the balance of risk shifts to the downside.
After all, it is evident for anyone to see that the recent events confirmed that a rapid rate hiking cycle had an excessively negative impact on the real economy and, perhaps, the most crucial structural foundation of all, Main Street lenders.
Ultimately the Fed was in a no-win position with an impossible needle to thread. Had they paused, the market would have thought, what do they know we don’t and could have triggered a worse outcome. The good news is the Fed is unlikely to hike again any time soon; the bad news is the problems in Main Street lenders will most certainly impinge on the real economy.
When I went back to the drawing board at the start of this year, I had a hard time paying 18x for 0% expected earnings growth, and that was before the market plumbing sprung a leak and foundations cracked. So now, with rates markets back to signaling recession imminent, stocks should start to buckle as investors grow increasingly nervous that the regional banking story doesn’t subside, and we lurch from crisis to crisis.
And now that Pandora’s box has been opened, investors remain on high alert about other risky rate-sensitive assets lurking on banks’ balance sheets, specifically regarding commercial real estate loans, which could be the next domino to fall.
We are amid the biggest confidence game in history, which the Fed and the US administration may have lost. However, I will note that we are only a fortnight into a new chapter, but the balance of risk appears to be shifting to the downside once again.
With more than 25 years of experience, Stephen Innes has a deep-seated knowledge of G10 and Asian currency markets as well as precious metal and oil markets.