Everything changed in 2018. It's a theme I have been pounding the table on almost all year.
The acceleration of QT paired with a Fed that is hell bent on taking the fed funds rate to neutral so that they will have the ammo to fight the next recession is a double barrel approach to monetary policy that the economy, very obviously, is not in any condition to handle.
There is an interview with Stan Drukenmiller from yesterday where he speaks about calling the past four recessions by observing price action in certain sectors as being a bonafide tell of an impending recession. What has changed, however, is the fact that algos have completely diminished the signaling power of the markets. They have turned what were once reliable price signals into nothing more than noise that can be discarded along with 99% of the other observable phenomenon occurring in the markets today.
For that reason alone, it may be misleading to judge the markets based on price signaling that has worked in the past. The very basis of many of the algorithms that dominate trading is a trend following approach that is further reinforced by passive investors (ETFs) whose clientele will always buy market tops and sell market bottoms. Among the few humans left actually utilizing intellect to analyze the markets there is a very real tendency towards recency bias predicated on the 2008 financial crisis. Everything on the downside, whether fundamental or technical, is framed in the context of 2008 for the modern day investor.
With the aforementioned tendencies of algos, passive investors and recency bias among thinking investors there will be a tendency for all of these parties to converge along the very same lines arrived via different paths.
The danger here is that markets are reflexive in nature. Negatively reinforced price action irrespective of how ignorant the cause of selling can negatively influence fundamentals within the economy. Confidence is fragile. Most obviously demonstrated by the fact that once it's lost, it is nearly impossible to regain. Once investors lose confidence, their behavior can influence institutions that extend credit, create jobs, purchase machinery and invest in the general economy. Especially when every single management team in the developed world is operating against the backdrop of 2008 being the framework for any negative eventuality.
The actions of the Fed tomorrow in the form of any hike whatsoever with continued QT to the extent of $50 billion per month can irreversibly tip the weight of confidence towards the blatantly negative side of things, pushing the economy into a situation that will be precarious due to the limited resources of governments worldwide to fight back to back crisis situations.
This is chess, not checkers. Hopefully the Fed got the memo.
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