This is prepare you for Yellen's Jackson Hole speech tomorrow.
1 Dovish Fed during Improving Macro economic conditions
2 Hawkish Fed during Improving Macro economic conditions
3 Dovish Fed during Declining Macro economic conditions
4 Hawkish Fed during Declining Macro economic conditions
The Fed should never get us into conditions 1 and 4. Boom and Bust. But they do all the time.
What everyone wants us to be in and the Fed at least pretends we are in is condition 2, renewed economic “animal spirits” where they Fed can raise rates.
In reality we are in condition 3. The Fed talks hawkish but acts dovish. We are in a weak economy.
Bank of America’s performers per condition:
1 The fed overheats the economy; everything is good. Performers are equities, credit, commodities and EM equities until market corrects as investors think the Fed is ‘behind the curve’.”
2 This is where everyone wants us to be right now. Performers are USD, value, banks/cyclicals & EAFE equities.”
3 This is the condition we are in currently. Performers are “bonds, gold, growth & U.S. Equities.” Bank of America calls this condition "secular stagnation".
4 This disastrous condition comes after the Fed is Dovish when macro is improving – the first condition listed. Performers are “cash, volatility, defensives.”