The Fed is raising interest rates into an economic slowdown—this has incredibly dire consequences for markets.
Hedgeye CEO Keith McCullough hosted a complimentary edition of “The Macro Show” on Tuesday to address this. (Watch all 31-minutes of this edition here.)
“Today, everybody needs and wants 75 to 100 basis points of rate hikes, because they think that's going to fix inflation… If you think that raising rates by 250 basis points tomorrow is going to change the CPI number next month, you're literally an idiot, right?”
In other words, as the Fed bends to the will of Wall Street and raises rates, they’re tanking the U.S. economy AND not fixing underlying inflationary issues. Then there’s this: “If you get tightening financial conditions into a #Quad4 economic slowdown, you will implode the stock market.”
BOTTOM LINE: You should carve out ½ an hour and watch this complimentary edition of “The Macro Show.”
Below we’ve transcribed key excerpts from this edition to keep you prepared for the next big market move.
Keith McCullough: First on the VIX. We have a very interesting setup here. You have options expiration for the VIX tomorrow morning, which makes it a bit messy before the Fed reports whatever they're going to do. And then you have SPY, or the big monthly options expiration, which is, of course, on Friday. Over $3.2 trillion in notional is going to expire, which is one of the all-time records.
Even yesterday, when you look at the notional that traded in terms of the S&P 500, around $758 billion in notional S&P 500 puts were traded. If that sounds high, that’s because it is. It’s the second highest of all time with the largest of all time actually going back to January 24th.
So again, you have more and more people asking why this is happening. “Why why why why?” It's because more people are trying to run money with more leverage and less liquidity. I've thought this for a long, long time. Hedge funds in particular that are trying to run neutral with massive amounts of gross exposure and tight or neutral net exposure, the only way that they can re-adjust is through the lens of these options.
The bigger this gets, the more problematic it is, and that can be exacerbated by the level of volatility in the market. That’s a problem right now because the level of volatility is in the F-bucket. So again, the F-bucket is when the VIX is north of 30-31. That’s where equities go straight down.
McCullough: So today everybody needs and wants 75 to 100 basis points of rate hikes because they think that's going to fix inflation. All the people that need this and want this are the same people that needed you to believe that inflation was transitory last year.
So again, it's like bullshit upon bullshit.
If you think that raising rates by 250 basis points tomorrow is going to change the CPI number next month, you're literally an idiot, right? That's not going to change it. We walked through it on “The Call” this morning. Don't forget, we're the ones that told you that the Shelter component of CPI was going to make the CPI number double this time last year.
So it's not about raising rates to take down inflation. If you raise rates, you invert the curve further.
We're not telling the Fed to do precisely what they shouldn't do in #Quad4, which is tighten or raise rates into a slowdown. The Fed shouldn’t be doing 50 basis points, they shouldn’t be doing any! Got it? That’s according to me, and until they stop doing more than expected, the market’s just going to just get us paid more on the short side. If they do what's on the board there, 11 hikes, the S&P is not going be -22%, it's going to be -32%, then -42%. Okay? And for those of you that don't think that can happen, the Nasdaq as of right now is -32.7% from its cycle peak.
Tightening into #Quad4, this has been our call the entire year. It's not a call from the heavens. It's a process-oriented call that I've never had wrong—ever. I said if you get financial conditions tightening into a #Quad4 economic slowdown, you will implode the stock market, you will crash it, which is a greater than 20% decline.
I have 100% batting average on that. Keep it here.