HSEP Weekly Update 3/31/23
End of the week. End of the month. End of the quarter. Nowhere to go but up!
And that wraps up the first quarter of 2023! Woof. Perhaps David Hunter’s melt up theory is going to play out after all? I have to be totally honest, I don’t really think there is much of a reason for stonks going up unless they’re accounting for the next round of debt monetization that we appear to be hurling toward very quickly.
Remember that whole plan to reduce the Federal Reserve balance sheet? This is the chart that was making the rounds over the last few days:
Yeaaahhh…. about that. 11 months of tightening - half of it given right back in *checks notes* TWO WEEKS. Now of course, all of the Fed apologists policy wonks have come up with all sorts of reasons why the Fed hasn’t actually pivoted; citing interest rates that Jerome swears he’s going to continue hiking. Maybe he will, maybe he won’t. But if he keeps hiking while the liquidity hose stays on to backstop underwater financial companies, that’s probably the worst outcome for the little guy imaginable.
The reason I believe that is because hiking rates will continue to put pressure on anything that generally gets financed by the consumer; home sales, car sales, furniture, appliances… jeans… Meanwhile, the banks get to borrow new magic internet money against assets that the market says are drastically overvalued. It’s a bit like a fire fighting crew rolling into an entire town that is on fire. All the buildings. All of the houses. Everything totally up in flames.
The fire fighters have never really seen anything like this before so there is no strategy in their training to consider. Because there is nothing in the handbook for this, they decide to put out the bank fires and pretend it’s so the people in the houses won’t die. Now here’s the twist at the end of the movie, it was actually the firefighters who lit the match. Fun times!
With a liquidity hose, I think it’s a reasonable assumption that risk assets could increase. The problem with getting irresponsibly long equities is if hikes do indeed continue, businesses are going to see earnings compression. I can’t say I’d be shorting these stocks, but I still think it behooves us to be more selective.
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