In the last few days, S&P 500 has risen by 300 points almost 8% from the lows. This has made some headlines calling the usual "everything is priced in" and the market is looking towards a pause for the rate hikes from September 2022. On the same thesis, global brokerages have started to print neutral reports that mention markets recovering all the losses by end of the year.
When was the last time analysts and news reporters said that was very distant from reality especially when a crisis was on the doorstep? Yes, you are right to be reminded of the dot com bust and global financial crisis. But this time the main concern is inflation and that is unlikely to come down before it creates large-scale chaos.
Yesterday JP Morgan's head gave a warning to the audience that get their balance sheets in shape for a hurricane-level recession that is coming to the USA. Well, he is right in saying this but it will not be limited to the USA. Cause when was it possible to remove a table cloth without breaking the cutlery on it and that also especially when the cutlery is worth trillion dollars bubbled up.
That is why imagining that 8% bounce will be a reversal to such a level of transformation that has just begun. This bounce was mainly led by rebalancing by pension funds and insiders buying their stock as the thesis spreads. There will be some flows coming through in June as quarter-end rebalancing as well. But VIX is far away from done and it needs a full breakout before cooling to lower levels. Especially when tightening accelerates in September 2022 and inflation would be higher for energy and food items.
The only solution to this might be in finding a way to solve energy and food problems, and to everyone's disappointment, it would get worst. This might lead to economic shocks seen in the 1970s that would surprise already surprise decision-makers but the question will you print to subsidies or crash the demand?