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A chart speaks louder than a thousand words

After Powell's speech on Friday, it is practically a fact that the tapering (decrease in the purchase program of US Treasuries and MBS), would be announced at the Fed's monetary policy meeting on November 2nd (9 more days).







However, this isn´t the only thing that can be inferred from his sayings. He said that while he continues to expect inflation to be transitory (because he cannot say otherwise even if he believes something different), he clearly pointed out that the risk of inflation is to the upside and the FED will act if it sees that inflation continues to rise. As in Chile, where the Central Bank raised the MPR by 1.25% in a single meeting on October 12th, and other countries in Latam and the world have followed or implied future rate hikes due to the same inflationary phenomenon, it is not surprising the rise in short-term nominal rates in the world.



The 2-year rate on treasury bonds has risen 70% in October so far



The market is anticipating a probability of around 70% of at least 3 rate hikes in the United States as of December 2022, from zero hikes a few months ago. On the other hand, the growth of the United States for the third quarter estimated by the Atlanta`s FED ("GDP Now"), it´s at 0.5% from the 6% growth expected in this quarter just 2 months ago. China on the other hand, although it weighs less than the United States in size, has accounted for about half of the world's growth in the last 15 years and is also slowing rapidly, where its energy crisis and the one of the real estate sector (which weighs around of 1/3 of its economy - much more than other countries), are also affecting its growth where (as published 1 week ago), that country grew only 0.2% (Q / Q). In other words, it can be said that expectations for growth in the short term have fallen dramatically in just a few weeks and it would not be unusual to start reading the word "recession" in the coming weeks in the press. The fall in the fiscal impulse that I have commented on in this section is part of the factors that I have pointed out would explain this trend. This has been causing a flattening of the rate curve in the United States (and the world), where short-term rates rise at a much higher speed than long-term rates. If inflation continues to rise, we could see a scenario in the coming months where more rate hikes are internalized. Higher rates in the market and more inflation have an impact on consumption and fixed investment, which affects growth.


Considering this macro scenario, Mr. Market is at the highest valuation levels in history and what one reads from his speech is that almost everyone believes that the party is going to continue. One of the strongest arguments that the "bulls" have for the above, is the great liquidity that there is in demand and current accounts in the United States. However, only 1/3 of the estimated USD2 trillion in "excess liquidity" in those accounts is estimated to be in the hands of the 80% of lower incomes in that country. That is to say, 2/3 of that liquidity is in the hands of the segment that has the least propensity to spend (because it does not need to). Furthermore, with rising rates at this speed, people will begin to "feel" the "extra" flow provided by that deposit that previously gave nothing (before, the opportunity cost of spending was zero; well, now it will not be zero).



Although I do not have the chart below updated, the trend is reasonable to think that little has changed



I have commented that the "reverse repo" line that the FED has been implementing strongly for 6 months (where the use of this line was practically zero at the beginning of the year), and that now it has a use of USD1.4 trillion, it is not expansive but on the contrary, the FED has withdrawn USD1.4 trillion of liquidity from the market with this instrument (which, in my opinion, the FED had to place as an emergency so as not to affect expectations by withdrawing stimuli from its purchase program and to continue financing the United States Treasury by buying its debt to finance its "support" programs), so if the purchases of USD120 billion per month are added, the FED has withdrawn, in net terms, more of USD0.5 trillion of the economy for 6 or 7 months (simply because for months that economy does not have more space for - and does not need - more liquidity).


Liquidity will not be the same in the coming months. A graph that I believe is worth a thousand words in reference to the above is the annual growth rate of the use of "margin debt" by investment banks, which is contracting and is - as shown in the graph below - quite correlated with the S&P500 (the increase in interest rates or the expectation of it does not favor a growth of this variable in the short term).



12m growth evolution of the use of margin debt vs the S & P500



As always there are many more factors to mention. Although it seems that the correction that I indicated that would happen in the S & P500 is over (after falling 6.4% since the beginning of September measured by the futures of the contract in front), and everything will continue to rise, I remain cautious and I think that a correction greater or much greater than the one that just happened could be just around the corner.





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