Podcast: Pilot Powell’s Impending Pile-up with the Stock-Market Hallelujah Chorus on Board

Plane made of burning dollar bills symbolizes price inflation and the Fed moving to digital currency

Stocks soared, treasuries fell, and the message from Team Fed was “full speed ahead with tightening.” Where did all of Wednesday’s market lunacy come from? We leaped from “Bad news is good news” straight to “Bad news is AMAZING!” Every Fedhead who spoke in Wednesday’s planned lineup made it clear the Fed is dead-reckoning its way straight through tightening and won’t let up until it kills inflation even if that wipes out the plane we’re all flying in. Yet, stocks soared to where the Dow closed up well above 400 points, and the Nasdaq snapped a seven-day losing streak.

The Fed’s Vice Chair Lael Brainard used almost exactly the same words Powell had pummeled the market with, stating the Fed will fight inflation for “as long as it takes.” Powell said, “till the Job is done.” His words tilted markets into a power dive. Hers lifted the nose back up again. Brainard even made it clear that the Fed expects it will take “some time” for its battle to turn inflation around. However, she gave just a breath to the notion that the Fed needed to be careful not to go too far, and that was all the oxygen the market needed to burst back into flames. It was like someone broke a window in a smoldering house, and the house exploded into flames.

Zero Hedge described the market’s response over such insignificant words as pretty desperate and summarized the day’s news as follows:

Normally, today’s Beige Book would be bad news – if modestly for Democrats and the Biden administration – as it confirmed what everyone knows, namely that the US economy is stagnating at beast [sic.], and slowing in reality. However, with bad news now widely viewed as great by a market starved for anything that will accelerate the coming recession – as it means the Fed’s tightening campaign will be cut prematurely short – the fact that according to the Fed, economic activity was downgrade [sic.] to “Stagnating” … with home sales falling in all twelve Districts and residential construction … constrained as “residential loan demand was weak amid elevated mortgage interest rates”, was clearly just the bullish news markets wanted.

Zero Hedge

Part of the action was, admittedly, a bear squeeze, forcing people to cover their short positions. Most of it was brain-free testosterone. The bulls just had to try on the “bad news is good news” again but ramp it up to “bad news is outstanding news” to take another full-on run. I say, rather than proving how tough they are, they’ve just proved how stupidly bullheaded they are, but what can you expect a bull to be, if not bullheaded? I’d be surprised if this market derangement syndrome at such a level can even hold together for more than a day.

To summarize the day’s market news, home sales were reported as falling hard, prices too; bond yields rose quickly on Tuesday again to compete against stocks, though they took a slight breather on Wednesday; real wages declined, consumer use of credit just to buy necessities took a big leg up; and fourth-quarter GDP estimates were slashed downward again by the Atlanta Fed just like we saw starting to happen around this time last quarter when the GDP forecast started sliding from positive to negative; and the Fed reiterated many times that it will tighten till the job is done.

That is all bad economic news, and in rational times, it would be bad news for stocks. Regardless, it all added up to stocks soaring like drunken flying aces because, to all appearances, we’re already back to news of a stormy economy forcing the Fed to do what it has now stated many times it will in no way do, which is pivot. The market, which has said as justification for its bets for years, “Never fight the Fed,” said this time, “Let’s fight the Fed and keep betting it will pivot before ‘the job is done’ until we force it to pivot.” Now, that is delusional! They have forgotten, the Fed owns all the money and is legally mandated to tighten “until the job is done.”

But that is the way sentiment works. It’s pure deep emotion with seemingly no intelligence at the controls. The Fed doesn’t care. It will ignore all of that and not pivot. Powell isn’t about to march out all his troops to repeat his “read my lips” message and then cave in before “the job is done” with inflation. He not only has a mandate, he has an angry populace already, which will be MUCH more angry if this inflation continues through the winter (as it will) now that some are buying on debt to keep food on the table and many are set to be evicted. (See today’s news.) He has politicians who will be angrily grandstanding when their inflamed electorate is breathing down their backs, even if those politicians want to spend money. They will insist, like Senator Warren, on the impossible — that the Fed stop inflation and keep printing money to spare people from the ravages of recession. Intelligent thought left the discussion decades ago.

(Of course, news spread today that Hillary Clinton finally stated yesterday she will not run for president. So, whoohoo! Maybe that, all by itself, got the market whooped up into an ecstasy for reasons that would seem totally rational to me.)

All of this happened while I was giving a podcast interview, and I hadn’t had time during the morning to pay attention to what markets were doing. It kind of surprised me because it was such over-the-top irrationality; but, with this market, I shouldn’t have been surprised at all. We had several harsh down days after Powell’s Jackson Hole speech, so an attempted break-out by the bulls is to be expected, given the market plunged so quickly from its August peak that it was already down almost 10%. Heck, that’s a move into correction in normal times right there, and reason to take a breather.

The kind of pumping action where bond yields go up and drain stocks down, then bond yields settle and allow stocks to go back up, is also to be expected as I laid out many months ago so that when it happened, you wouldn’t make much of the back-and forth. As stated back then, stocks will keep ending up the net loser in that back-and-forth because bonds are the ones being driven to rise in yield by a Fed determined to pump the handle hard enough to make certain they do in order to pump liquidity out of the economy and lower the level of economic activity. Stocks are just responding to the Fed’s pumping. There are always burps like this along the way. It’s just that, today, the catalyst for the rise — the excuses — were so beyond desperate: “The economy is looking a little weak, so the Fed will pivot a little sooner.” After Powell’s clarifying talk, the market is floating on nothing but wishful thinking.

Pure delusion. Remember, these same manic delusionals were betting the Fed would hint at pivot in Jackson Hole, and he did the opposite. The Fed will do exactly what Powell said it will do — battle inflation until it can clearly see a new downward trend in inflation has been firmly established. As Powell said, a single month’s move down doesn’t mean much. He needs to see a meaningful trend change that he believes will continue without additional Fed pressure, and even then he doesn’t want to make the mistake of the seventies and hit the gas again only to have to foolishly fight the battle all over again with everyone mad at him for jarring the plane around so much in flight. If that happens, the passengers will all be howling, “Geeze, Cpt. Powell, can you throw us out of our seats a little more!” No one is going to thank him for slamming into the tarmac and bounding twenty feet right back into the air just to slam down again.

Today’s market action largely played out while I was chattering away about how the nation’s grossly built-up debt load, especially after the last two years of extravagance, leaves the nation utterly dependent on low interest, making Powell’s QT aspirations truly hopeless. As we see junk bonds showing significant signs of stress already due to rising interest and housing actually taking a good-sized drop in prices and sales due to rising interest and consumers using more debt just to buy groceries because inflation is making it hard to make ends meet right as their variable interest rises, all ala Plan Powell, the pain Powell promised is starting to kick in. Stock investors can play all the games they want, but that pain is just starting, and it is going to get much worse as we ramp up later this month to full QT reverse thrusters … mid-air!

Those are the things we spoke about in the interview — the significance of the next step up in QT and how much the pain will reverberate through the airframe of all markets, scaring stock investors even worse than the Fed did with its devastating QT in 2018. That event was nothing like “as boring as watching paint dry,” while this one with more debt-dependence, more low-interest dependence and a faster rate of interest increases and much faster rate of QT will be more like having hot paint thrown in your face. It will be far more jarring than it was in 2018.

Higher interest, until it manages to curb inflation, only makes those prices harder to pay — particularly for the group that is already buying its groceries (see that story in The Daily Doom) on credit with adjustable rates. That’s the plan. Many don’t realize that’s HOW Plan Powell works? The Fed puts the screws to everyone to crush down on everyone’s economic activity by making credit a lot pricier so that everything costs EVEN MORE until they get you to stop buying. Then the demand destruction finally brings down price inflation.

So, the pain is just getting cranked up. All stocks have had to deal with since Powell’s pontification on inflation … is talk. Later this month it gets real as Pilot Powell kicks in the reverse thrusters at full throttle while we’re still a thousand feet above runway altitude, and we get to see how well a 747 flies with its engines in reverse. That’ll be fun! (Higher reverse-thrust QT than ever attempted in history, and you get to be on the test flight!) There are a few planes built to handle that; but, while I’m not a pilot, I’m pretty sure a 747 is not one of them. However, Powell assures us he’s rigged his to make it possible, and he’s going to prove he can. But, remember, he’s also doing this inverted. In this case, inversion means the yield-curve inversion says he’ll be landing a 747-size economy that is already in a recession.

Let’s see how brave these investors are when they feel all of that downdraft because the plane is going to drop quickly at that point and end wearing the tarmac for a hat.

Powell’s first landing in a pilot trainer. He’s got a knack for this kind of thing.

To hear the interview as I rant about the foolishness of any belief in a soft landing, the debt disaster that is starting to emerge and Wednesday’s market mania, click the following link:

Destructive Capital

(It’s the interview at the top left of the page.)