Markets traditionally snooze during the summer months of July and August.

In Europe, everyone who is anyone in the financial markets leaves for the south of France, Greece or Spain (although this year I wonder why; temperatures are attractive enough everywhere (in the south of Germany we are at 38C today; all we need is a beach!) to consider foregoing the trip south!).

In the US, market participants leave for the Hamptons (although rumours during the slump from April to mid-June were that many “masters of the universe” were cancelling their summer bookings) for July and August.

This year may be slightly different though.

The Shorts Are Suffering!

The Federal Reserve (Fed) is busy increasing interest rates. And the European Central Bank (ECB) is busy trying to save Europe’s monetary system.

In the meantime, the S&P500 has risen 13.50% since its multi-year low on 16Jun22. And the yield on the 10-Year Treasuries has fallen from a high of 3.4791% on 14Jun22 to the current 2.7282%.

And this despite the Fed raising interest rates by an eye watering 1.5% over the same period and the significant, and very real threat of an official recession (however that will be defined by the time it happens). And not only in the US.

Europe’s political class, Germany’s in particular, is occupied trying to avoid economic suicide over its Russian sanctions, particularly the supply of natural gas which threatens to bring its industry to a standstill and cause massive disruptions to the supply of electricity to its citizens over the coming autumn and winter.

To any seasoned market observer, it appears that the market is doing the unthinkable.

Fighting the Fed.

Has The Market Lost Its Mind?

This is an interesting development because markets should really be about pricing demand and supply whilst in some shape or form accounting for the risk market participants are taking.

And markets should, at least according to the “official version”, listen to the intentions of the central bank.

It has happened before.

Remember the 1980s? Inflation was high and “trust” in the Fed was low. The market did not believe that the Fed meant business when it said that it wanted to reduce inflation to more reasonable levels.

The result was that interest rates went as high as 16% and the economy took a lot of work to get back to an even keel.

During the post mortem of the time, “experts” frequently pointed out that interest rates had to go that high was that the Fed had lost the respect of the market. Market participants no longer believed that the Fed really wanted to bring inflation down.

The situation today appears very similar.

The Fed talks about wanting to reduce inflation and reducing the excess liquidity in the market. The market sees things differently. At least for now.

The One Thing To Keep In Mind

Marketing experts amongst you will recognise this.

You cannot beat down a good story. And markets are all about a good story!

The story in question being that stocks had their best month in quite a few years. And that of course sells itself as a market recovery.

And now the bullish pundits have another bullish talking point. And a new bull market and new highs to talk about.

Not quite sure who penned this classic quote, but it has been around a while. “When bad news is good news, and good news is rampant, it is time to buy.”

The “good news story” was reinforced by stronger than expected economic numbers. Consumer spending, employment and manufacturing all played their part.

The ISM report showing that manufacturing prices had declined supported the “good news story” as well. The market, or rather the “storytellers”, are now convinced that the inflation shock has been absorbed. Meaning that future Fed rate rises, if any, are likely to be more restrained.

Rarely are things quite this simple though.

The Opposing View

There is significant doubt as to whether or not the Fed can pull off its tightening stunt. Primarily because of the state of the US economy. Despite the good economic numbers there is a very high probability that these numbers have been a flash in the pan and will not be repeated.

Two quarters of a shrinking economy spells recession.

And a recession is usually an excuse to reduce interest rates rather than increase them.

The Risks Involved

What risks are we talking about?

Primarily “authorities” making policy mistakes.

Here are a few to choose from. Geopolitical. Monetary. Political.

Geopolitical - The obvious ones are tensions with China over Taiwan. And an escalation between the countries of NATO and Russia over Ukraine. And the ongoing conflicts in Syria and Yemen which also involve the same, and more, players.

Monetary – Central banks appear to finally be doing one of their jobs. Containing inflation by raising interest rates. For many central banks, their second job is maintaining full employment as well. Maybe we can leave it at fighting inflation for now. Mainly because central banks are not very good at that in the first place. And multi-tasking is quite challenging for linearly thinking “experts”.

Political – Where do I start? The risks are too numerous to list. The list of geopolitical risks is already quite long. If you then add political responsibility for the acceleration of inflation globally, think

1. pandemic responses globally
2. energy prices, primarily natural gas, have spiked. Germany’s energy security is in tatters (this is very much self-inflicted and mind boggling in its stupidity!)
3. supply chain issues which have been worsened by political interference in the market mechanism and respective pandemic responses (China being a prime example), and
4. increasing discontent globally about food security versus “top down” driven climate change issues (Germany, Holland, and Italy)
   our political and technocratic “overlords” have created quite a mess they have difficulties finding their way out of.

What Will The Future Bring?

In the end we will see how this pans out. My guess at present is that the market, at least the BIG players in it, are involved in a rather common form of market manipulation.

On the equity side, the big players are looking to suck in the retail speculators by ramping up stock prices for the next few months to levels around 4,300-4,400 in the S&P500 (which is a 50% or so retracement off of the lows compared to the high in January 2022) and then quietly exit and prepare for the real crash resulting from the Fed increasing rates further, and the economy continuing to not do well.

On the bond side, the big corporations will take advantage of the temporarily low interest rates and load up on debt. Apple is a good example here. Despite USD180bn in cash on the balance sheet, it raised another USD5.5bn at 1.5% over 10-Year Treasuries for up to 40 years.

Apparently an additional USD30bn or so bond issuance is in the works over the next few weeks.

Once interest rates normalise at the levels suggested by the Fed, it will be significantly more expensive for corporations to raise debt levels.

Just when they need all the cash they can get in a worsening economic environment.

What Does This Mean For Crypto?

The correlation between equity and crypto remains quite strong. Just as equities have risen in price, so have the drivers of the crypto market.

As such I believe the reprieve we have had in the price of crypto may just be that. A reprieve.

The bear market in crypto will likely return. In all likelihood at the same time equities get their comeuppance.

But that is just my guess of what may happen.

As the saying goes, forecasting is hard. Especially the future!

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