Petulant Children Need More PALM
The pathway to a risk asset top goes through the introduction of dual sided risk to the Fed’s next policy decision. Removing the asymmetric bias where the bar for the Fed to cut rates is much lower than the bar to hike rates will help re-introduce rates volatility, invigorate term premium, slow down animal spirits, dampen inflation expectations and bring down actual inflation.
Options markets are pricing in 20% chance of a hike, up from basically 0 at the start of the year. Strong data for April on inflation, labor and growth is likely to keep pushing this higher and will help act as restrictive force on further asset price momentum for a market than acts consistently like a petulant child in demand of incessant liquidity from the Fed.
I have coined this dynamic as PALM, the Perpetually Accelerating Liquidity Machine. Financial markets need to see PALM is coming at all times and be on the receiving this PALM to stay happy. When they don’t get the PALM, they behave like whining children, revolting by selling off assets in order to force the Fed or Treasury to bring PALM back.
As I have been discussing, for now, the “put” level to bring back the PALM is way lower than here given a world of still above target sticky inflation. So markets need to go thru their convulsion stage to find the next level where the PALM can be provided. This is the way back to target.
