Power Flattening

I don't remember seeing that kind of curve flattening after an FOMC meeting since Janet Yellen made a hawkish gaffe in March 2014, causing the belly of the curve to plunge, while the long end barely moved.  This was actually a bigger move than March 2014.  

The 5-30 spread went from 140 to 117 over 24 hours.  The 5-30 curve steepener just happened to be the most popular trade on Wall St.  You really only get these six sigma moves when speculators are offsides.  This looks like the end of the steepener trade has gone out with a bang.  I expect further flattening of the curve over the coming months, as traders re-assess their outlook on Fed rate hikes in 2023 and 2024.  

The June FOMC meeting didn't seem hawkish at all, it just seemed like traders were set up too bullishly ahead of the event, causing that dip in stocks and bonds.  Of course the economic outlook would be upgraded considering how hot the economy is, and those minor changes in the dot plot are just the Fed trying to micromanage their outlook, and act as if they can predict the future, which of course they are horrible at. 

You know you have a crap economy when the central bank decisions are much more important than any fundamental changes in the real economy.  

The Fed will still be too late to act, even more than during the Bernanke years, due to the added high from fiscal stimulus this time around.  This time around, they are fiddling around while asset prices are through the roof.  Its likely that when the Fed actually gets done with tapering of asset purchases, which should take about a year to complete, it will be near the end of 2022, when the Republicans will have probably won at least the House or Senate, and gridlock will be on for 2023 and 2024.  I don't say that to be presumptuous about Republicans winning seats in the midterm elections.  Its basically automatic if you look at the history of a Democrat president with a Democrat majority Congress going into midterm elections.  

So I will act like the pompous and arrogant Fed, with their dot plots and forward guidance, and put out my scenario for the next 24 months.  

For the rest of 2021, with the Fed behind the curve and moving like a turtle when tightening, the stock market bubble gets even bigger, and SPX goes parabolic, busting through 4500, 4600, 4700 like they are midget hurdles.  In 2022, at super bubble valuations for stocks, the market gets unstable.  Much like 2000 and 2018, the volatility and chop get violent, even without any rate hikes, just by the mere act of reducing bond purchases.  By the time the midterm elections come around in November 2022, the stock market has already topped out and entered into a long term downtrend, with the Fed now faced with the decision to start hiking rates as their manufactured bubble is popping before their very eyes.  

Much like December 2015, the Fed probably manages to put out one measly rate hike during the tumult, either at the end of 2022 or early part of 2023, just to maintain a tiny bit of credibility about their forward guidance, and then go into a pause, shell shocked, as the popping of the biggest bubble in our lifetime wreaks havoc.  Eventually the stock market will be down enough and the pain too great and the Fed will relent to the financial markets, as they always do, and reverse their only rate hike and then start QE Infinity Part 2 in 2023.  

Market is looking a bit toppy here, intraday volatility is increasing, put/call ratios have stayed low for a while, it looks like another 100-150 point pullback in the SPX is just around the corner.  I am waiting for it.