The Single Most Important Chart for 2022

Here it is.

The big showdown setting up for 2022 after well over a decade of the likes of Rick Santelli (and bond market vigilantes/hawks) being routinely ridiculed by newcomer investors and some of the middle aged investors who pretty much only knew a Greenspan (or "Easy Al") Federal Reserve regime since the 1990s. 

But with The Fed in the early stages of actually changing regimes, I do not expect them to shift back to QE/ZIRP or NIRP/ultra easy as quickly as many folks seem to think they will. In fact, I would argue they will surprisingly not shift back that way as inflation remains sticky much longer than most expect. 

Given that view, the bond market is in the very early stages of ending its four decade bull run since the early 1980s. 

The chart, below is the monthly chart for the TNX, or rates on the 10-Year Note. This chart is very roughly, for example, the flip side of what you see with TLT, tracking prices for Treasuries. 

As you can see, in order to reverse a monstrous four decade downtrend you must start with the basics and actually stop going down. This happened in early-2020 into the pandemic. The next step is to find balance at a higher price level and coil for an eventual breakout higher. As we speak, this looks to be happened (highlighted in light blue). 

David Tepper recently noted in a CNBC interview that he was growing cautious on stocks and bonds because he was concerned about rates. Tepper has a history of being careful with his remarks when it comes to the bearish side, as he is self-aware of his market influence. But if you read between the lines, it should be clear that if rates spike higher it can certainly be a tail risk for markets. 

As usual, the key will be the rate of rates. In other words, how fast do rates go up? With Powell and The Fed well behind the inflation curve at this point, I expect them to expedite their inflation reactions early next year. Recall that The Fed has been an active player in the bond market with QE and what not, as opposed to stocks. All of the cries that, "If inflation is so bad then why are rates so low?!" have conveniently overlooked that fact, of The Fed's active distortion of the market mechanism in fixed income. 

I expect that to be unwound without the mythical "soft landing" in 2022, which renders the chart below to be the most important one I see on the board. A fast spike higher in rates seems inevitable to me at this point, although I do not think that is a consensus view at all (which gives me more conviction). This will, in due time, perturb equities even if they are, as usual, the last one to get the memo.