Will the Fed rate hikes curb inflation and stimulate the economy, or will they induce a recession?

1. FED SHOCK THERAPY
26 MAY 2022

2. WAR ROOM
Idea Generation
Macro Coaching
Scenario Updates
HiddenLevers runs on SCENARIOS like Instagram runs on PHOTOS
Fed Underwrites Economy
Climate Disasters
Real Estate “Post” Covid
COVID 2.0

3. BRINKER BAROMETER
Unstable
Stable
Coins
Record Inflows into
Dubious Assets
Market
Pillars
Falling
Retail Margin
Compression

4. 500
600
700
800
900
1000
1100
1200
1300
1400
sources: HiddenLevers, Nasdaq, MarketWatch
FED SHOCK THERAPY ECON PULSE CHECK
OIL GDP
Lumber Prices
Q1 -1.5%
New Home Sales
Travel
Retail Sales
-22.5%
-44%
Sharp Declines

5. TRENDING SCENARIOS
INFLATION + ENERGY – big corps raising wages
DeFAANGed – seismic sentiment shift

6. sources: HiddenLevers,
FED ROULETTE REPLACE
NEW FED SCENARIO NEEDED
Powell + Bernanke admitting no soft landing
Still in Play, Fully Priced In at SPX 3500, becomes baseline
10y
3.17 High
2.75 Now

7. FED SHOCK THERAPY NO SOFT LANDING
sources:
Nasdaq down 30%
average S&P 500 stock 30% off high
S&P price-earnings from 22x to 16.5x
investment-grade debt yields from 2.25% to 4.5%
junk yields from 4% to 7.75%
30-year mortgage rates from 3% to 5.25%
monthly new home sales down 25% since EOY 2021

8. CPI
sources: HiddenLevers, FRED, FRED
Real GDP
Real GDP and S&P 500 are both at 75% of target
levels from Pre-Pandemic Q4 2019 highs
High Levels of Inflation appear to be the culprit
Nominal GDP growing at 5%/Year, above target
2% Trendline
S&P 500
75% of Normal
Growth
10% Trendline
75% of Normal
Growth
2% Trendline
4x
FED SHOCK THERAPY S+P 500 FAIR VALUE

9. FED SHOCK THERAPY TECHNICALS
sources: HiddenLevers, Twitter
Pre-pandemic high
50% retracement of rally
3400
4850
2200
3400 will be strong support

10. sources: Yardeni
FED SHOCK THERAPY CAPITULATION
SHARES TRADED AS % OF SHARES OUTSTANDING FROM TOP TO BOTTOM CURRENT BEAR MARKET

11. FED SHOCK THERAPY HEAD SCRATCHERS
sources:
GOLD VIX
rangebound
Low anxiety compared to drops

12. sources: HiddenLevers, Globenewswire, MotleyFool, ZeroHedge
RL -5.15%
WMT -19.68%
TGT -33.44%
XRT -8.05%
JWN -7.01%
Walmart 2 day May sell worst since Oct 1987
May 17-19 Target + Walmart lost $125B in MarketCap
Consumers with discretionary income still spending
FED SHOCK THERAPY RETAIL DIVERGENCE
Upper Class Consumers still spending
1M Performance
70% of US GDP is Consumer Spending, Are Walmart and Target Pandemic Darlings?

13. sources: HiddenLevers, Reuters
Fed Rate Hike Cycles
FED SHOCK THERAPY VOLCKER SHOCK
Volcker Shock Similarities
• Raising rates
• Decreasing the balance sheet
• Inflation caused by excess aggregate demand
from monetary and fiscal stimulus
• Supply shortages
1979-1980 2022 YTD
Macro Event Iran Revolution Russia -
Ukraine
CPI +13.5% +8.2%
Oil +36% +43%
Nat Gas +18% +147%
Gasoline +38% +74%

14. FED SHOCK THERAPY GOOD
Sets up for rally in
second half 2022
Fed minutes point to
September pause
10y well below 3 again
THREE HIKES
A CHARM

15. FED SHOCK THERAPY BASELINE
3400 very solid support
Fed emulates Volcker
Fed can’t break
gas prices
INDUCED
RECESSION

16. FED SHOCK THERAPY UGLY
Mortgage costs doubled
since March 2022
Home sales down 25%
US housing up by 33%
since start of pandemic
RATE HIKES
HIT HOUSING

17. GOOD
UGLY
EQUITIES CONTRACTION
LEADS TO NEGATIVE WEALTH
EFFECT LEADS TO HOUSING
CONTRACTION
NORMALIZATION OF GDP,
RECESSION AVOIDED
RECESSION HARD TO AVOID
WITH Q1 NEGATIVE US GDP
AND CHINA GDP WARNINGS
FED SHOCK THERAPY MACRO RISK PARITY
BASELINE
INDUCED
RECESSION
THREE HIKES
A CHARM
RATE HIKES
HIT HOUSING
S+P 500
3000
-25%
S+P 500
4500
+13 %
S+P 500
3400
-15%
GDP
-1.50
FLAT
GDP
2.00
+350 bps
GDP
-2.50
-100 bps
NASDAQ
10K
-13%
NASDAQ
14.5K
+27 %
NASDAQ
8K
-30%

18. Retail sales show middle class cutting back,
wealthy still consuming
Fed put is kaput, but hikes could stop in Sept
Fed policy mistake in play, fully priced in at 3400
FED SHOCK THERAPY WHAT TO SAY
S&P 500 at fair value at 3850, notwithstanding
pandemic hijinks

19. JUNE WAR ROOM
US HOUSING CRYPTOMANIA