The Big Short Squeeze Is Coming

The latest rate hike announcement by the Fed sent stocks tumbling to the year’s lows. While last week’s market action was brutal, the good news is the markets are set up for a rather significant short squeeze higher.

It is quite likely the Fed has already tightened more than the economy can withstand. However, given the lag time of policy changes to show up in the data, we won’t know for sure for several more months. However, with the Fed removing liquidity from the markets at a most aggressive pace, the risk of a policy mistake is higher than most appreciate. I added some annotations to a recent graphic from Chartr.

short squeeze, The Big Short Squeeze Is Coming

With the Fed now hiking rates, seemingly intent on doing so at every meeting in 2022, has the correction priced in the “bad news?”

The issue, of course, is that we never know where we are within the current cycle until it is often too late. An excellent example is 2008, as I discussed recently in “Recession Risk.”