“The Fed Finally Pushed the Stock Market Over the Edge”

So said Barron’s as the Dow dove almost 1,000 points on Friday and completed its fourth down week in a row. The Dow’s dive (981 points) was the worst since the Coronacrash in 2020. In two day’s time, it has fallen over 1300 points. Even before the big polar-bear plunge, stocks were seeing their worst outflows of the year. And, now, the market and financial news are joining me by saying, “Oh, maybe a recession really is near.” (After months of telling us the economy is really, really strong.)

Investors are rapidly exiting stocks, with U.S. equities seeing their biggest weekly outflows of the year as recession fears take hold. U.S. equity funds had outflows of $15.5 billion in the week through April 13, while European funds experienced a ninth straight week of outflows, Bank of America Corp. strategists wrote, citing EPFR Global data. The bank’s private clients — with $3.2 trillion of assets under management — also exited stocks in the largest amount since November.


The big waterfalls of the last two days were all the Fed’s fault … well, that and a whole lot of weighing concerns — as in reasons the market should have been falling well before now — but denial is hard to break on the bull’s inebriated and sentimental journey. So, the market pretended for some time it had all of the Fed’s future tightening already programmed in and had fully accounted for all the turmoil to come from the war and sanctions and that Fed tightening was fully accounted for.

All rubbish, of course. I’m sure you remember me saying many moons ago the Fed would have to taper and tighten sooner than everyone expected, which it did when it started tapering last fall, which is what got the market started falling, eventually taking the Russell 2000 and Nasdaq into bear territory. And you likely remember me saying the Fed would be so far behind the curve on battling inflation because it believed its silly “transitory” narrative that it would quickly have to speed up the pace of its taper, which it did last December when it doubled down barely a month after it had begun.

You probably even remember me saying a year ago that inflation would reach a roaring inferno that would burn up the Fed’s backside, forcing the Fed harder into the battle to where it would have to tighten to the point of crashing the market; and, if it refused to tighten that hard, inflation, itself, would destroy the economy and crash the market.

Well, with inflation burning its hottest in forty years, Chairman Powell capitulated on Thursday to the raging inferno in gingerly Fed-speak manner and assaulted the market with a whisper of truth by saying the Fed will have to pick up the rate of tightening more than they thought they would have to at their last meeting. That took the final two days of the week over a cliff. Yet, listen to how gingerly he said it:

“It is appropriate in my view to be moving a little more quickly” to raise interest rates, Powell said while part of an International Monetary Fund panel moderated by CNBC’s Sara Eisen. “I also think there is something to be said for front-end loading any accommodation one thinks is appropriate. … I would say 50 basis points will be on the table for the May meeting.”


It was, however, some of the other Fed heads that really got the market storm downhill on Friday. They made it clear the Fed might pull a raging and rare 75-basis-point interest hike at its next meeting, and some of those were the doves! The market immediately lost its balance like proverbial Jack and tumbled down the hill into the weekend.

Barron’s summarized it like this:.

The stock market tumbled this past week as investors finally decided it was time to prepare for the worst-case scenario—a Federal Reserve-induced recession.


Yes, the market said, “OK, I guess they really are going to tighten us right into a recession.” I know you all remember me saying that is exactly what the Fed would wind up doing; but the market was apparently unaware until now that this is what was going to happen, so it was startled by these interest-spiking words.

Other than the Fed’s admission that it will have to up the pace for tightening yet again, the news flow of the week was fairly benign. There was nothing particularly unexpected on the war front. The superficial jobs/employment numbers that the market likes to focus on had come in looking relatively cheery with new unemployment claims below 200,000. Housing, which had begun to wobble just a wee bit in some sectors, came in above expectations. The IHS Markit’s Composite Purchasing Managers’ Index came in well below expectations, though, so the market may not have liked that; but it was still above recessionary levels.

All was chugging along in the bump style we have grown accustomed to over the past two years until the Fed started flapping its lips; but what else can it do? When you gotta raise interest, you gotta raise interest. Is it the Fed’s fault that investors are stupid and thought they had the worst priced in when they aren’t even close? Sure it is. It has numbed the market with months of nonsense about inflation being transitory. It has told the market over and over the economy is strong. (Then how is that, all of a sudden, we are going into recession with super-hot inflation?) This is what waking up from denial feels like.

Thus, we now witnessing how inflation forces the Fed to tighten faster and faster until it “kills the stock market,” which is the reality, as my regular readers also recall, I bet my blog on. I’m not taking a victory lap and saying Friday’s fall will get us their in one fell swoop, but just noting that is what you are watching because I wouldn’t want anyone to miss seeing how predictable the Fed’s failures are because the Fed only creates totally dependent recoveries, so they fail every time the Fed pulls back its life support. (Those rinse-and-repeat cycles I laid out years ago, as I documented in my little book Downtime.) So, it’s all going according to plan — that is to say, the way you can tell just by looking at the design the Fed’s plan is going to go. (You cannot solve deeply embedded, structural and economic design flaws with monetary policy — make that monetary inflation, which is to say, inflating the money supply. You only push the problems forward to make them worse to deal with later.)

The merry matriarch sings a duet with her old friend, Ben

Suddenly, all Fed eyes are screwed into the inflation numbers. Inflation matters at last. It took a lot to crack all the Fed heads and former Fed heads out of their denial; but they seem to be starting to wake from their dull delirium. Not entirely, though.

Federal Reserve balance sheet reduction not happening yet even as the Fed applauds its own success
Gramma Yellen

Take, for example, the Grand Matriarch of the Fed, Grandma Yellen. She made another one of her brilliant proclamations on Friday, harmonizing with the claim she made when she was retiring from the Fed, when she said that we had seen the last financial crisis in her lifetime. Having apparently outlived herself, she is now entering the second financial crisis since she made that proclamation, and yet she doesn’t see this one coming either, even as she’s riding in the locomotive that is already going over the cliff. “Whoopee!” Yellen yelled again, “There is no recession in sight!” Good times are right ahead, I guess.

Former Federal Reserve chief Ben Bernanke Federal Reserve creates all recessions
Uncle Ben

I think maybe she just wanted to try to pull a Bernanke. Gentle Ben has long held the Golden Hemorrhoid Award for being up to his hiney in a recession while proudly wearing that warmly satisfied Ben Burn-the-banky smile when he announced back in 2008 there was no recession in sight. They practically had to pull the recession out of his hind side after he said it because he was sitting on it.

Ah well, as both Uncle Ben and Yamma Yellen have said, the Fed crashes every party it throws. It’s always the one that holds the smoking gun and has never seen a recovery it couldn’t kill. Yes, they both actually admitted that, practically in unison.

Not all banksters agree with their cheery demeanor at present:

In a report this past week, Deutsche Bank Group Chief Economist David Folkerts-Landau warned that the Fed might have to raise interest rates far higher than expected, perhaps as high as 5%, well above the firm’s baseline view of 3.6%. And it will need to act fast to prevent even higher inflation from getting embedded in expectations, forcing it to raise rates even higher and forcing a deeper slowdown. “Prepare for a hard landing ahead,” he writes.


That, you may recall, is another problem I noted a couple of days ago:

Inflation continues rising as the Fed is working its way up there, so it’s a race to find the top as the amount it will take to curb that rising inflation grows along with the inflation.

In other words, the market prices in what it think the Fed will have to do to stop today’s inflation; but it is not today’s inflation that it will have to stop! It’s whatever level of inflation we hit by the time the Fed actually has interest rates high enough they can accomplish something. I also indicated the Fed will not get its base-rate up to 4.5% before it has destroyed everything — not far out of line with the 5% Deutsche Bank says will be a “hard landing.” (That is a bit of an understatement where “hard landing” means “crash.”)

The Fed, I said,

will do the job of killing the economy for us long before it gets to the point of killing inflation, which means a deep stagflationary recession, worse than any recession you’ve ever experienced unless you are nearly a hundred years old.

Inflation May Take the Food out of Your Mouth before it Goes Away

The bond stormers arrived

Soaring bond yields, I said, would be sucking the stock market down like a pump before the Fed even began to tighten, and we saw that in the chemistry this week as the yield on the 10YR treasury pressed above 2.9%, reaching for the big 3.0. No doubt that woke the market up a little, too.

The outflows come as concerns about recession dominate markets, according to strategists led by Michael Hartnett. “Everyone fears it,” with food and energy prices surging, he wrote in a note. Meanwhile, a rise in bond yields means that the so-called ‘TINA’ argument — that there is no alternative to equities — is “turning,” according to the strategists.


Oh, suddenly “everyone” fears recession. Right about when I said recession would be hammering us. In other words, it’s all going according to plan — that is to say the way you could see well in advance this plan would go whether the Fed believed it would go this way or not. (You have your choice: they are blind to their own failings because of their bankrupt economic theories — their guiding ideology — even though they are smart people in terms of their IQs. That’s quite possible, just as Karl Marx and Validimir Lennon were very smart but totally wrong. Or they are evil co-conspirators. Many of my readers lean that route, and I’m fine with that. Either way, you can look at the plan they lay out and see how it’s going to go … because the plan never solves any of our deep economic flaws.)

First the reluctant Fed, slow to the battle, arrived like a cavalry riding their horses in backwards:

The nation’s central bank thus far has been a reluctant fighter in the battle against inflation, with leadership resembling that of George McClellan, the Civil War general fired by President Lincoln for failing to aggressively attack the Confederate Army under Robert E. Lee.


Yes, that’s why we have inflation burning well above 8%, and that’s measured using the gentle math of the new inflation, not the hard numbers that were used in the seventies. (Doing things like asking homeowners to guess — yes GUESS — how much their houses would rent for and using that easy route to figure out what the average inflationary impact of rising home prices is, which in a housing market like we have just ripped through is a major miss. As if most homeowners have any idea what rents are!)

So, the bond vigilantes, rode in ahead of the reluctant Fed to do the job for them, raising interest faster than you’ve ever seen it climb before the Fed has even starts to get serious about interest hikes. (All we have so far is talk.) The Fed has moved interest a whopping one-quarter of a percentage point, but the bond vigilantes have already priced in a yield-curve inversion, signaling recession.

They raised the recession flag while the Fed’s base interest is sitting at an incredibly loose and stimulating 0.25%-0.50%, meaning about 0.33%. That sudden yield-curve inversion before the Fed even moves ought to get the recession popped out of Bernanke’s behind since that is where he keeps them. That is why I said the key to watch for in knowing things are going according to plan (apparently my plan since the Fed professes ignorance about things going this way) was to look for the bond vigilantes kicking up the dust in bond yields, more than you’ve ever likely seen, as the Fed wound up its taper and, thus, got out of their way. They would be like uncaged animals.

The Fed, I said, would have to run just to catch up with them, and that is why we hear the Fed heads murmuring now about that 75-basis-point hike straight out of the gate, which would be their largest increase since 1994 — almost thirty years. Inflation is rising faster than the Fed is arriving to fight the battle? In fact, right now, the Fed’s balance sheet is still slowly expanding as it rolls over the interest on all those bonds it owns and refinances everything as it matures. Can you believe that? All this, and the Fed is so far behind the game that it is actually still letting its balance sheet grow a little higher!

So, the Fed, fast as its talk is ratcheting up, hasn’t done anything more than almost stop QE and throw out a token quarter-of-a-percent hike. Yeah, that’ll do her, boys and girls! So, if you want to see this dull market go for a ride, wait until we start actually raising interest in big chunks and start tearing down the balance sheet in big chunks. That’ll be fun!

While I won’t lay any of my money on a 1% hike, I wouldn’t be surprised if the Fed is forced to take that big of a leap two weeks from now when it holds its May meeting, now that inflation is peeling the skin off its back.

The market will be surprised by all of this. I’m sure it believes that, as of today, it now has everything priced in again. The market is really going to love it when the vigilantes kick things up to 3.0 on the 10YR bond. But even that will be nothing compared to when the Fed actually joins the battle if inflation hasn’t already beat them and destroyed the entire town before the Fed’s backward-riding cavalry arrives.

This is what it looks like when everything falls at once — bond prices and, therefore, bond funds, stocks, and now housing has shown a bit of a wobble as mortgages have gone from under 3% to over 5% in less than half a year’s time.

That looks like this:

Woohoo! What a ride!

That’s the work of the bond vigilantes there, folks, since the Fed hasn’t done a darn thing yet but talk while they continue slowly inflating their balance sheet. Without any serious move by the Fed, mortgage rates are rising based on what the bond vigilantes who demand higher interest are doing to the thirty-year bond (and to some extent due to what they’re doing to the 10YR). It’s the longer-term bond rates that affect mortgage interest, mostly the 30YR because it matches the duration of a mortgage.

The old bond pump, you see, is working exactly like I said it would, but BlackRock has a different story because they have funds to sell:

Still, BlackRock Investment Institute’s strategists are more optimistic. “Yield spikes have often spelled trouble for stocks, but we believe the past is an imperfect guide in a world shaped by supply shocks….” Central banks won’t slam the brakes on the economy, thus keeping real yields low to underpin equity valuations, they said.


Yada, yada, yada.

Sure, “It’s different this time,” they said. That’s what they say every time. Ah well, as my cousin used to say, “You can’t take a horse to water.” (He was never really good with expressions.)

Wanna bet? Watch these guys do it:

The bond vigilantes driving bond prices over the cliff (soaring yields = plunging prices)

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