Some traders I speak with regularly asked me to post some macro ideas. So here goes....
We all know Federal Reserve is raising interest rates. This is what the Effective Fed Funds Rate will show you.
But this is only half the story. Fed is also doing QT - as in , reducing the size of its balance sheet. You can easily plot both these data series together on Tradingview .
This creates a double-whammy of tight financial conditions whereby the rates the corporate borrowers are actually likely to pay ( or pay somewhat close to) is measured more accurately by Proxy Funds Rate published by San Francisco Fed. You can read all about it on their website.
Now, till Fed started QE in response to Global Financial Crisis 2008, Effective and Proxy Rates used to track each other closely. That is because Fed Funds Rate was pretty much the only tool in Fed's arsenal. But since QE got added to the quiver of arrows, a very visible divergence is for all to see. That is the real pain of the tight monetary policy that the borrowers are facing.
And corporate borrowing is starting to level off.
This was recently highlighted by venture capitalist Bill Gurley on All In Podcast hosted by Chamath Palihapitiya , Jason Calacanis, David Friedberg & David Sacks .
If rates continue to tighten along with QT, credit cycle turning is a real risk that Corporate America faces and that could potentially lead to a not-so-soft-landing. We all know what happens when the punchbowl is finally taken away.