Sun. Jan 16th, 2022
From <a href=""Zero Hedge

Timing The Crash: Why “Buy The 1st Rate Hike, Sell The Penultimate Hike” Won’t Work This Time

Speaking on CNBC, the FOMC’s most clueless member – NY Fed president John Williams who runs the world’s most important trading desk yet has zero trading experience and every market crisis shows it – said that the Fed is “very focused” on taming “too high” inflation and will be able to do so without causing a recession.

That, of course, is a lie: as we last week, virtually every single rate hike cycle since before the Great Depression ended in disaster (and/or recession)…

… and this time won’t be any different, just like the brief bear market at the end of 2018 which ended the Fed’s last rate hike cycle, wasn’t any different.

Guaranteeing that there will be a very sad ending (at least until the next QE/NIRP/ETF purchases at which point everything will go vertical) is that in keeping with the long-running theme from BofA CIO Michael Hartnett that we are about to get the double whammy of “Inflation Shock…Rates Shock“, Hartnett writes in his latest Flow Show “here come the central banks…Fed to end QE in March & hike thrice in ’22, BoE hiked 15bps despite Omicron surge, Norges hiked 25bps, ECB tapering & hinting rate hike in ’22; in contrast in EM…swaps market hinting China could cut 50bps next Monday & Turkey aggressively easing (Turkish stocks up 54% in local-FX terms & down 27% in US$-terms YTD).”

However, while everyone knows how it all ends – in both nominal and real terms – the question is when.

And here we get some useful insight from Hartnett who reminds us of the “wonderful old market adage” to “buy the 1st hike, sell the penultimate rate hike”  because “first rates hikes are “good” hikes on back of strong growth and mid-cycle bull market.”

But this time, the BofA strategist says that this market-timing adage is “wrong” as inflation is already out of control and even with speedier end to QE, and central banks are only slightly less out of control.

As a result, Hartnett writes that tighter financial conditions remain his key investment forecast into ’22, and his favorite trades are as follows:

  • Tighter financial conditions = long US$, long MOVE/VIX, short credit, short PE/XBD.
  • EPS deceleration/flatter yield curve/high CPI = long quality, defensives, yield & shortextended cyclical (SOX/XHB), long commodities to hedge inflation
  • Contrarian = short Nasdaq (“hubris”), long EM/China (“humiliation”).

Which brings us back to the point up top, namely that inflation always precede Recessions: whether driven by asset, housing, commodity, consumer or labor, inflation is like a very high body temperature, and must be reduced via tightening or recession to return the body to normal and ensure future good health.

And while global growth is good right now (despite Omicron risks) with just 6% of investors forecasting recession in ’22 (a recent FMS finding we mocked last week), the risk that the coming “rates shock” quickly morphs a into “recession scare” is high.

Finally, according to Hartnett, UK mid-cap stocks and yield curve are the best leading indicator of “policy error” – case in point, in 2017/18 BoE’s 1st rate hike was the penultimate rate hike, and markets were sold.

How to best position for the coming pain? As BofA puts it, “Defence until Capitulation and/or new Declaration of Indulgence“, or in other words, remain defensive and bearish until a) positioning shows full-blown capitulation and/or b) credit events/losses on Wall St force central banks to announce reversal of tightening.

Tyler Durden
Sat, 12/18/2021 – 16:25
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