Max Pain
Like I Said...Less Fun
Welcome to the Terrordome.
As I wrote in my “2022 Thesis”, “Prepare to have less fun.”
What you are seeing in both traditional and digital asset markets is what I was talking about when I published those words.
I have been expecting to see the S&P 500 as low as 4,400, the DJIA as low as 34,000, and the NASDAQ as low as 14,000. Markets haven’t quite capitulated to these numbers, but they are getting there. I didn’t have a local low in mind for $BTC and $ETH, but I suspect that we’re getting to it.
Before the year is out, the macro framework that I predominantly employ as a mental model calls for the S&P 500 to reach 6,000, the DJIA to reach 45,000, and the NASDAQ to reach 20,000. And after these indices approach these numbers (I’m personally not so sure they reach them), I’d expect to see a crash down to maybe 2200 in the S&P 500, and to whatever that corresponds to in the DJIA and the NASDAQ. Digital assets will not be immune to this downturn.
As I said in my 2022 thesis, 2022 will likely be a year of high volatility. This will likely be difficult to stomach, and my bet is that there will eventually be a crescendo upwards in asset prices across the board before a bust. In other words, my bet is that we will see euphoria followed by pain, the type of pain that will make this current correction across the board seem like a blip on the radar. Let’s call it “max pain”.
The Fed may raise rates, but that seems to be getting priced in now. In my opinion, I think the Fed is just kind of playing the role of an institution that wants to now seem hawkish, because it has to. And Biden has to seem hawkish, as well, as a means to signal to his voter base that “he’s on it.” As Jim Bianco discusses in the video below, 40% of Americans have less than $1,000 in the bank and are struggling financially as they watch prices in the grocery store continue to rise, so they want someone to be “on it.”
For more from the prolific Mr. Bianco, I suggest reading the thread below, as well.
So, Biden has to at least pretend he can do something about this if he doesn’t want to see his party completely slaughtered in the midterm elections. His administration might also be dumb enough to implement what some of the saddest, “fourth branch” mainstream media outlets in the world have begun floating…
To the idea of price controls, I respond with a quote from Immortal Technique:
“Welcome to the Third World”
But back to being hawkish… I say Biden has to at least pretend to do something about inflation, because, as Tascha discusses below, if inflation is mostly being caused by supply shock, there is little the Fed can even do to curb it.
So, much like politician speak, Fed speak is also mostly theatrical rhetoric. (This isn’t to say that they won’t actually raise rates, though.) If the Fed’s simply signaling to the market that it’s going to raise rates cools the market off, then, theoretically, there isn’t as much of a reason to raise rates. (I still think they will; I just don’t think it will have as adverse an effect on markets as people think at first.)
So, again, as I said in my 2022 thesis, strap in for what has already begun to be a wild ride this year in markets.
Lastly, I’m reading Ray Dalio’s new book “Principles for Dealing with the Changing World Order: Why Nations Succeed and Fail”, and I wanted to include my reflection on it below.
Best,
Frank
Twitter: @frankcorva
“Blame it on human nature, man’s destiny / blame it on the greediocracy / fear of God / the fear of change / the fear of truth…” -NOFX