Rich Excell's avatar
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Chart of the Day - trivia night.

Had a long and stressful drive from Tahoe back to Palo Alto yesterday, driving through the mountains that were under chain control due to very rough conditions.

We made it, though, and then found ourselves unwinding at Fred's Place in Mountain View for trivia night. Team names there included 'Unemployed' and 'FDIC' bringing home the notion that the SVB and First Republic issues are very real in these parts.

Everyone was in good spirits (and full of good spirits too) as we made our way through various categories such as true crime, name that tune and historical texts. Good to see people in a good mood in spite of the bad news.

The market has been working thru various categories too such as Fed bailout, historical context, and Fed pivots. Collectively, the market seems in good spirits as well in spite of the bad news at the end of last week and into the weekend.

The Fed pivot narrative is back. A week ago, the market had hikes through the summer with the rate cuts not starting until 2024. JayPo had made sure of this by being particularly hawkish.

However, now the market sees hikes stopping in May and the cuts by this summer in a 180 degree turn from the views just one week ago. This is providing support to the longest duration risk assets like tech stocks and crypto.

The mkt also likes the Fed bailout which made whole customers and depositors. The Fed is lending $100 against as little as $60 of collateral to banks that need the liquidity to prevent bank runs.

What is the historical context for all of this? If we look at the chart today, I show the Fed Funds in blue, the Global Financial Stress Index in white and the US Financial Conditions Index in orange.

We can see the Fed had pivoted long before things got ugly in 2008, reversing course in late 2007. This didn't support risk assets. In fact it wasn't for some time that the fincl conditions really tightened and stress picked up. Monetary policy acts with a lag.

If we look at the fincl stress index and the fincl conditions, both have moved up in the last week, but neither is as high as we were back in October. The Fed didn't pivot at that time. Are we sure it is going to pivot this time?

After all, the bailouts given come at the risk of re-accelerating inflation that JayPo is so dead set on stopping. A week ago we though 50 bps for sure in March. Now there is a debate about whether the FOMC should even do 25.

This brings to mind Bagehot's Dictum: "To avert panic, central banks should lend early and freely (ie without limit), to solvent firms, against good collateral, and at 'high rates.'

This comes straight out of a Federal Reserve research paper on the lessons of the Financial Crisis:

Perhaps Bagehot's Dictum will show up at trivia night next Monday.

Stay Vigilant
#markets #investing #rates #stress #fedpivot

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