Growing Signs of Distress in the Market

I would be surprised if a recession kicked off now, but between China and the central banks, there's definitely a disinflationary wind blowing since late 2017 it will continue into 2019. It looks like the technology sector is giving up leadership as social media comes under scrutiny from the public and government, the hope of driverless cars is shattered, cryptocurrency prices prepare to return to Earth and tech valuations and inflows mean revert. Whether this signals a stock market top or merely a changing of the guard in the bull market remains to be seen, but I expect at least something similar to 2015-2016 before all is said and done if only because of China.

I wonder if we might be closer to a downturn than the market expects, with market participants starting to sell liquid assets, but in a slightly different fashion, as we are still in a very low yield environment. They might have started liquidating some very expensive government bonds between end of 2017 and beginning of 2018, but, after a certain level of yields was reached, moved into selling short-dated corporate paper. If this trend in low beta corporate paper selling should continue (which is a big if), together with a continuation of the increase in T-bills yields (driven also by an increase in issuance and higher Fed rates), it could create pressure at funding level. This would potentially translate (at a certain point) to a shortage in Dollar funding, which could theoretically be supportive for USD itself (like in 2008, with the USD bouncing only after Bear Stearns at the beginning of the year), which would be in line with the view of a potential tactical bounce.

I think one of the scenarios the market is not pricing is that the Fed might have already tightened (or it is very close to) financial conditions too much, but other elements may have hidden this, especially in 2017 (i.e. Chinese liquidity injections). Something like what I tried to explain above might be one of the canaries in the coal mine. I understand it is a bit of a far-fetched hypothesis, but I would appreciate any thoughts or feedback, especially those that go contrary to my view.
While on the subject of a potential recession, there's also the 1962 analog that saw stocks drop 25 percent from mid-March through the end of May. The economy experienced a recession in 1960-61 and the stock market drop froze hiring for several months. A dip in economic activity today would push GDP growth below 2 percent and possibly below 1 percent.
My spidey-sense isn't tingling as in late 2015 when credit spreads widened near their 2011 highs and importantly, to a level associated with bear markets and and recessions, but there is elevated risk of a significant market decline. The Dow Transports missed triggering a Dow Theory sell signal intraday by 1 point before rallying at the close.

In sum, signs of distress are piling up. VIX blew out in February. Technology is being taken down in March. I give the bears the benefit of the doubt on funding stress because this is Year 10 of a deflationary/disinflationary depression punctuated by outright deflation in 2011 and 2015-16. The Hong Kong dollar is still on the verge of hitting the peg limit and forcing HKMA intervention. I do not know if this signals immediate trouble, but I strongly suspect there will be trouble in 12 to 18 months at the most.

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