The data and price action last week reinforce my conviction that Wall Street risk assets are now in a classic Catch-22, heads I win/tails you lose scenario. The strong economic growth data we saw in February and spike in inflation metrics mean more Fed tightening than implied by the 5.4% terminal Fed funds rate and 3% five year breakeven TIPS. This is bad news for risk assets. The tails you lose scenario is that the Fed monetary sledgehammer triggers a recession, as the inverted yield curve, resurgent King Dollar, embryonic crude oil price crash and the St. Louis Fed GDP model suggests is now happening in real time. This means a fall in corporate profits and a crash in risk assets. My call? The equity risk premium, like Shakira’s hips, never lies, as I have warned ad infinitum over the past month.
“It is no coincidence that the S&P 500 has lost 5% in January and violated its 50 day moving average trendline even as the yield on the 10-year Uncle Sam note has spiked from 3.35% to 3.95%”
