2-4-6-8! Capitulate!
Lots of investors want the Federal Reserve to pivot, as you might have read recently. They’re almost equally desperate for markets to capitulate — give up all hope, hit rock bottom, admit that all fears are coming to fruition, and create a sound base to buy.
Compared to the last two decades, investors are 2.6 standard deviations overweight cash and three standard deviations underweight in equities. If this isn’t total capitulation, it’s nearly so. Hope is close to lost.
The perception of riskiness might be driven by widespread complaints that liquidity is running out. This is the natural consequence of tighter money from the central banks and greatly increases the risk of financial accidents.
A belief that liquidity is drying up leads naturally to predictions that the Fed will soon have to execute its “pivot” and start to cut rates again.
But is this just wishful thinking? And why exactly do they expect the Fed to turn around? Increasingly, it’s because they believe markets will break.
Falling inflation is still seen as the most plausible trigger, but over the last month, many have adopted the idea that a “global credit event” (and the most plausible culprit is thought to be another blowup in the eurozone) or a crash for the US stock market will force the Fed’s hand
Finally, sentiment ahead of earnings season is miserable, and indeed as negative as it’s ever been (including during the Global Financial Crisis).
John Authers Bloomberg 19 oktober 2022
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