Powell pulls a Keynes. John Maynard Keynes (purportedly) said, “When the facts change, I change my mind. What do you do, sir?” You have to hand it to Fed Chairman Jerome Powell: He’s not afraid to change his mind, either. At the May FOMC meeting he said this: a “75-basis-point (0.75%) increase is not something the committee is actively considering.” Now the Fed ( via the Wall Street Journal and CNBC ) is signaling that they are likely to raise rates three-quarters of a point on Wednesday. So much for the Fed blackout. What changed? The facts changed. The inflation data is not going their way. Is this flexibility a sign of resilience (strength) or fragility (weakness)? If Keynes is right, it is surely a sign of resilience. Others will argue Powell is getting pushed around by the market. Whether the market gives the Fed any credit for changing its mind this late in the game remains to be seen. S & P 500 bear The S & P 500 closing in bear market territory (down 20%) was the big news Monday, but it is a relative latecomer. With the exception of the Dow Industrials, most other major indices have long since joined the club: Major Indices (% from 52-week high) Dow Transports 29% Nasdaq 100 33% S & P Small Cap 23% S & P Mid Cap 22% ARK Innovation Fund 72% At least fund managers know earnings are coming down. Every month, Bank of America releases a survey of global fund managers. These kinds of sentiment indicators are most useful when sentiment is extreme, and here we have some pretty extreme readings. The June survey shows pessimism across the board: 72% believe global profits will weaken, the worst reading since September 2008, which was the height of the Great Financial Crisis. The most popular description of what the economic backdrop will be in the next 12 months is “stagflation” (83%, up from 77%), the highest level since June 2008. Relative to the past 10 years, investors are long cash, commodities, and healthcare, and very underweight equities, tech, the Eurozone, and Emerging Markets. Another useful question to look at is “most crowded trades” which is usually a good indicator when a particular trend is topping out. Most crowded trades: Long oil/commodities (38%), which replaced “Long tech” months ago, Long dollar (19%), and Short Treasuries (13%). If you want to see how much inflation worries has scrambled the outlook for managers, look at the “biggest risk to markets” category. The biggest risk to markets are: hawkish central banks (32%), Global recession (25%), Inflation (22%), Systemic credit event (9%). Russia/Ukraine, which was the #1 risk to markets just a short while ago, is now a distant #5. Just 6% said it was the biggest risk.