The Big Picture: Policy Shifts are a Consequence of Pain

It is one big macro trade. Global markets are deeply intertwined and the correlations with interest rates and the U.S. dollar are driving the bus.

Fiscal and monetary policy

Years of printing trillions has its consequences. We are seeing inflation surge and central banks across the world are fighting it by tightening liquidity and raising interest rates. This has resulted in a massive correction in asset prices, especially in valuations of companies that are concepts and not yet cash flow positive.

Markets are still extremely over-extended with an earnings recession looming. While fundamentals are pointing to a downward spiral for equities, market technicals and internals are critical to navigate these treacherous times. To expound a little bit, the sentiment indicator is at its nadir when a majority of the 'active' market participants buy protection via puts and shorts. This reaches an extreme at some point and the pressure has to be released. A pressure cooker situation and in tail situations could result in an "up-crash"!

Opportunity?

A rebound might surprise, and a counter-trend move up is to be expected in over-sold bear markets. It appears that the market will attempt to put a support level floor before a final decline sets in.

We will reach a point when the central banks will ease because the costs will have grown too big in the form of economic and social pain. Once that happens, a brief, but strong rally might ensue. However, this may be inflationary and the cuts start again. A self-fulfilling central bank driven vortex.

In other words, we are not out of the woods yet.

Caution warranted

Our message to everybody out there is stay cautious. Be defensive, have your stop losses in place and do not over-trade. You will get chopped up and narratives will fool and trick you into doing things that you shouldn't.

Keep calm and carry on!

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