We believe the market to be wrong in the short term.
What we have seen in July/August thus far is a ‘reversion-to-mean’ rally. The short trade was overcrowded.
Markets must manufacture further liquidity and suck more participants in to signal the next leg lower. Alas, from a psychological perspective, markets looking healthier going into the September FOMC meeting on the 21st will be another incentive for the Fed to get more aggressive with interest rate hikes, they will be emboldened by the fact that current hikes haven’t turned the economy into a corpse.
We as humans are inefficient and rarely fix our mistakes, often repeating them. However, the market is one of the most efficient and precise tools ever created. It will correct its current mistake and lead the euphoric participants of recent months into becoming exit liquidity for those that are capable of reading and disseminating economic data.
If the central bankers really cared about fighting inflation, they would immediately raise the interest rates to match inflation levels. Imagine if the Fed raised rates to 8.5% (latest CPI print). It likely would stop many components of inflation in their tracks, albeit at the expense of asset holders and the ruling class. If the Fed is really prepared to do the unspeakable to fight inflation, then they should do it.