In today’s Money Morning … credit markets are not panicking … yet … what will happen on July 27? … this is a game you have to play … and much more …
‘Sell or not sell?’ that’s the question.
In the original line, Hamlet ponders whether it is better to live and be unhappy, or just finish everything and finish.
Unfortunately, for investors the choice now seems just as serious.
Do you stay in the markets and potentially see how they fall apart when central banks continue to tighten the monetary nuts?
Or will you go out now, step aside and maybe sell the fall when the markets come to life?
As always with investing, any decision can come with regret.
My personal rule is that if you are going to panic, sell the panic sooner.
You can always change your mind and redeem later.
Cash may be rubbish in the long run, but it’s also a dry powder that you need to take advantage of cheap stocks if we get a big fix.
This “if” is what investors are weighing right now.
And it all depends on what the central banks will do next.
The key date for viewing is July 27.
Let me explain why…
Credit markets are not panicking yet
Last week we focused on inflation and the three charts worth looking at on this front.
The figures in the official figures remain stubbornly high.
For example, in the UK last week, inflation reached a 40-year high of 9% – higher than in any other G7 country.
And in the U.S. last week, Fed chief Jerome Powell issued a serious warning to investors that until inflation falls, rates will rise.
‘We know it is time for us to be tightly focused on the time ahead and return inflation to 2%. No one should doubt our determination to do so … We need to see that inflation is falling clearly and convincingly.‘
Is he serious this time?
Or is he trying to calm inflation?
After all, there’s nothing stopping the Fed from raising rates today if it wanted to.
I guess they are slowing down and hope the data starts to peak.
Because they know the danger if they climb too far, too fast.
If they do, we will see that credit begins to dry up as lenders worry about the risks of default.
In a way, this will probably be the time when the Fed starts giving up tougher – the old Fed “Put” – because the credit crunch would be the only thing they fear more than inflation.
And there are the first signs that the debt is starting to rise.
Check out this credit spread chart:
In general, funding costs are rising rapidly.
Some say that we are still within the “normal”.
According to Bloomberg:
‘Goldman Sachs (NYSE:G.S.) CEO David Solomon is watching credit markets for signs of recession as financial conditions worsen after the Federal Reserve began raising interest rates to fight inflation.
‘Solomon, he is watching for wider credit spreads said Tuesday in a Bloomberg phone interview. The bank’s customers understand that economic conditions are getting worse, and the process is still going well, he said.‘
As I said before, as long as this market remains orderly, the Fed and central banks are likely to feel comfortable while continuing to tighten.
The fall of the stock market does not bother them, but the panic in the debt market does.
And so all eyes are on July 27 …
What will happen on July 27?
Right now, markets expect two more interest rate hikes in May and June.
What’s missing in the picture, so is what happens next? There were no instructions in this regard.
Although prices for 10-year bonds suggest a total of up to seven more rate hikes, it is clear that the Fed will want to see more information on inflation before announcing the timing and scale of the further boost.
And at the Fed’s July 27 meeting, we’re likely to get more comments on that.
If they continue tough talks, markets are likely to remain under pressure.
On the other hand, they may decide to give the economy more time to digest the changes to date before taking further steps.
This is the so-called “soft landing” approach.
A deeper story of it all, honestly, how ridiculous it all is.
Our system is that 12 people in a room decide the fate of billions of lives and assets worth trillions of dollars.
How strange is it that all this is quietly accepted as “normal”?
When I was in university, such a top-down “command and control” system was known as communism and was the antithesis of free markets.
Except for ideology, they still don’t do a great job.
As this tweet said:
But like it or not, but for now it’s a game you have to play …
Editor, Morning money
Ryan is also an editor Investor of new money, a monthly recommendation aimed at helping investors reap the benefits of early movement when decentralized finance and digital money take over the world. For information on how to subscribe and see what Ryan is telling his subscribers right now, Click here.