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Not even close to transitory. After giving its turkey advice for Thanksgiving, the Federal Reserve finally gave up completely on the “Inflation is transitory” chorus it has been singing all year. Chairman Powell of the People’s Bank of Amerika stated outright today that inflation is not transitory after all, confirming what I have been preaching all year, and he stated that inflation may likely force the Fed onto an even faster tapering path than the it already laid out, confirming the second part of what I have said all year:
Wall Street’s main indexes closed lower on Tuesday after Federal Reserve Chair Jerome Powell signaled that the U.S. central bank would consider speeding up its withdrawal of bond purchases as inflation risks increase, piling pressure onto a market already nervous about the latest COVID-19 variant. In a testimony before the Senate Banking Committee, Powell indicated that he no longer considers high inflation as “transitory” and that the Fed would revisit the timeline for scaling back its bond buying program at its next meeting in two weeksReuters
And, so, with that the stock market also responded in the manner I have said it will when the Fed actually starts tapering and speeds up its tapering because inflation grows to be so searingly hot the Fed cannot avoid speeding up its tapering of QE. Just talk that the Fed will be thinking about picking up the pace at its next meeting, sent the Dow down more than 600 points today, after having plunged more than 800 on what I’ll call Dark Friday. While the market recovered a mere third of its losses on Monday, it lost more than double what it recovered today, putting it already halfway into a correction (down 10% from a previous high).
“Powell’s comments threw a monkey in the wrench in market thinking in terms of potential taper timing. You’re seeing as a result of that, risk-off across the board,” said Michael James, managing director of equity trading at Wedbush Securities in Los Angeles…. Whether … more headline risk or reality risk … it’s having a significant impact on oil, and everything that’s tied to economic growth.
“The principal contributor to the decline in stock prices today is the Powell commentary, regarding the upcoming Fed meeting, about accelerating the tapering of their bond buying program, which obviously leads to the prospect that rate hikes come sooner next year,” said Mark Luschini, chief investment strategist at Janney Montgomery Scott in Philadelphia. “That somewhat hawkish shift in tone caught the market flatfooted,” Luschini said.
It wouldn’t have if the market listened to me, but for some reason some people — a great many in fact — found this readily predictable news entirely surprising. So, some of the market’s denial broke today. Whether that is a significant break that sets in the market’s demise that I have been predicting inflation will cause or just another shiver, remains to be seen. Denial dies hard, but it was a pretty deep shiver:
The declines were broad-based, with all the 11 major S&P sectors down…. “The market is clearly in some treacherous waters right now. You’ve had two significant pullbacks out of the last three trading days. This is certainly shaking some of the complacent longs in the market,” said Wedbush’s James.
Powell explained in his warning,
I think you what you’ve seen, is you’ve seen our policy adapt and you’ll see it continue to adapt to we will use our tools to make sure that higher inflation does not become entrenched.Fox
Yes, they will because, as I’ve recently started claiming, inflation has reached the point where it is now burning up the Fed’s backside, leaving the Fed no room to retreat on the tapering if things go bad and pressing it to even pick up the pace, in spite of the fact that it risks all the more that things do go bad.
“The reality is hotter inflation coupled with a strong economic backdrop could end the Fed’s bond buying program as early as the first quarter of next year,” says Charlie Ripley, senior investment strategist for Allianz Investment Management. “Ultimately, the transitory view on inflation has officially come to an end as Powell’s comments reinforced the notion that elevated prices are likely to persist well into next year. With potential changes in policy on the horizon, market participants should expect additional market volatility in this uncharted territory.”Kiplinger
Well, it’s not exactly uncharted because I’ve been charting this path and saying what the turning points would be (the causes to look for) for more than a year. But, I guess it is uncharted if you don’t read here … or do, but don’t believe me. So, let me tell you for clarification how that chart goes from here:
The Fed will pick up the pace of its tightening. The market will strongly revolt, and the Fed, badly as it wants to slow tapering down to save the market will have its back up to the wall, making that very difficult if not impossible to do because the price tag of that choice is even hotter inflation for longer, forcing much more intense tightening further down the path.
The Fed’s last experience with inflation of this kind when it let inflation run this far out of control back in the seventies was painful for the entire nation for a few years. I can guarantee you the Fed well remembers the incident. Most of them were around back then, so muscle memory will make it hard for them to do their usual reflexive withdrawal of tightening when the market revolts.
Thus, the waters ahead are more treacherous even than the articles above indicate. What they respresent is more like the best-case scenario if all goes well. In this fearful new Covid-plagued world, does that seem likely to you? It does not to me.
“Let them eat tofu”: Federal Reserve Combats Inflation at Thanksgiving with Unpardonable Diet Advice
The US central bank has apparently taken on a new mandate — being your dietary coach, advising Americans to fight the inflation it helped ignite by eating tofurkey and other soy-based foods for Thanksgiving, instead of turkey.
Diet advice you can bank on?
They say, “If you can’t take the heat, get out of the kitchen.” Unable to take inflation’s turkey-roasting heat, now running at 6.2%, the Federal Reserve has decided to turn that advice on its head and get into the kitchen — your kitchen. Putting its brightest and most forward-thinking economists to work to help you out, the Fed has calculated that a single serving of America’s favorite holiday bird now costs $1.42 while a substitute made from soybeans can be had for a mere 66 cents and offers the same number of calories.
As if the real reason you eat Thanksgiving dinner is just to pack on calories! Leave it to a bunch of rich, glass-eyed, tasteless bankers not to get why we eat turkey on Thanksgiving.
I don’t think anyone will be inviting Uncle FRED to dinner. In the very least, they won’t be letting him be the one who brings America’s favorite centerpiece dish. Some Americans aren’t swallowing the Fed’s advice and have retorted against their advisors:
I don’t think anyone is looking for nutrition advice from a central bank.— Pomp 🌪 (@APompliano) November 21, 2021
It would be easier for you all to curtail the persistently high inflation that you created, rather than take on a national nutrition campaign.
This like a post apocalyptic message after the FED has burned civilisation to the ground giving tips on how to stay alive.— Willy Woo (@woonomic) November 21, 2021
Imagine how cheap a picture of dinner would be and just pretending you ate!— Richard Heart raised $27M for SENS.org. Founded: (@RichardHeartWin) November 22, 2021
Americans are already Fed-up
We have no appetite for what the Fed is stuffing down our throats. We’re already sick of the fact that turkey dinner is going to cost 14% more this year than last … while Christmas dinner will be 15% more at the present actual rate of inflation. The cost of at the average turkey alone has gone up five bucks (up 25%)!
And why shouldn’t we be sick of it? Look at who is seated around the nation’s Thanksgiving table.
First, we have Papa Powell who is thankful this Thanksgiving that he got to keep his job. He reminds me of that turkey President Biden pardoned several days back.
Then there is Gramma Yellen, who should be yellin’ about inflation, but she ain’t. Instead, she was happy just to assure us all on Monday that the inflationary oven will cool off in about a year; so, for now, the Fed can keep overfeeding the nation on free money, which mostly goes to the rich.
Of course, Gramma Yellen is the same doddering Fed head who told us blithely a couple of years ago that the Fed’s tightening of its belt back in 2018 would be so easy it would happen on autopilot. It would be as boring as watching paint dry, she said. Instead, the market crashed three times that year to where the Fed had to abruptly pull the autopilot plug. As the Fed’s economic tightening commenced, the stock market experienced bad post-holiday indigestion in January and February of 2018, which turned into the worst start of a year in Dow history. Then the FAANG stocks, which had led the market for years, crashed about 40% in the summer as the Fed redoubled its tightening. Then, when they intensified their diet even more, the market plunged 20% in December, more than wiping out any gains it had made in the year. It looked like the Fed kept banging its head all year long like a bunch of stumblebums running down a staircase with a low ceiling.
Gramma Yellen is also the one who promised us there would never be another financial crisis in her lifetime. Apparently, she didn’t intend at the time to live much longer, given her age, because about a year after she spoke, the Covidcrash came along and was such a severe financial crisis that the Fed had to create more money to bail the nation out from that self-destruction than it did during the entire recovery period from the Great Recession … and it’s still bailing.
So, when Gramma Yellen comfortingly assures you now that inflation will be tamed in about a year, just remember smiling Gramma is apparently a little senile.
Next at the table of blame. We have sleepy, creepy Uncle Joe who has restfully assured the entire dysfunctional US family he is making inflation his top priority now that it has hit its highest level in about forty years. He announced he’s getting on the ball just as inflation hit almost 1% per month (as opposed to the Fed’s old target of 2% per annum). Of course, Uncle Joe promised us between L-tryptophan naps that he’d get right on the gasoline price problem half a year ago. He, then, called up his friends in the Middle East and begged them to pump more oil, but apparently calling for favors doesn’t work as well as it used to because gas continued to climb to near-record heights of $5 a gallon in some parts.
We’ve been inflating our bellies for a long time
I think the Fed should stay away from dietary advise and get busy with actually fighting the kind of inflation they are supposed to fight since they haven’t been doing any better with their own diet than many of us have been doing with ours.
Economically, our nation is morbidly obese because we are already overFed and overstuffed with excess money. At this rate, the US may soon look like that other Turkey — the nation — whose lira has crashed 35% relative to the US dollar this year, surpassing the declines of other banana-republic money due to President Erdogan’s gross mismanagement of the currency. Turkey has decided to outmaneuver the Federal Reserve in devaluing, not just the comparative value of its currency, but the purchasing power as well in order to keep stimulating its flaccid economy.
“We were either going to give up on investments, manufacturing, growth and jobs, or take on a historic challenge to meet our own priorities,” he said after a cabinet meeting in capital Ankara, his comment adding another 9% nosedive to the Lira. Score! In the race to the bottom.
According to Erdogan, he is engaging an “economic war of independence.” Independence from reality? Anxious to take the path of Zimbabwe or Venezuela in recent years? Or just trying to beat the Fed in a downhill turkey trot? Its banks may soon join the run because Turkey is going to eat the value of its currency to nothing — gobble, gobble.
Have no fear, Father Fed is here … just in time to eat your dinner! So, tofu up!
We have just entered those days of heady inflation that I have said will kill the stock market and bond funds. There is a tipping point at which inflation and the interest changes that respond to inflation matter, but it has never been a clearly defined point.Read the remainder of this entry »
The Inflation Death Spiral has Begun: Inflation Hits Stocks, Bonds and Government Like a Bomb Cyclone
One or two dimwits told me I was stupid to be thinking inflation would be the driving force of 2021 due to shortages and Fed money printing. The cockiest one even assured me his second-grade education in economics said inflation wasn’t even happening, yet inflation has relentlessly surged higher every month to finally now hit a forty-year high:Read the remainder of this entry »
BlackRock’s Jean Boivin just said there are not apparent signs of stagnation — just inflation. What Bovine foolishness:
Prices have climbed around the world, with commodities prices surging and U.S. inflation hitting a 13-year high. It’s the first time since the 1970s that a supply shock is the main culprit. This is where the comparison ends. There’s no risk of 1970s-style stagflation, in our view. Economic activity is increasing briskly and has room to run.BlackRock Weekly Commentary
How dense do you have to be as an economist to see so much of the following so well and, yet, not see at all what it is you’re looking at:
We have long held that inflation was one of the market’s most underappreciated risks. Now it’s here. This year’s surge is primarily driven by a major supply shock: the vaccine-driven restart of economic activity from the pandemic’s shutdowns. Producers have struggled to meet resurgent demand, clogged ports have increased shipping costs, and surging commodities have added to price pressures. These dynamics mark a sea change from the environment many of today’s investors know best: decades of low inflation on the back of deepening globalization and technological advances.
This reminds me of how only a tiny handful of economists could see the Great Recession coming when it was already here. Most economists could not see the recession when they were already standing in the middle of it. What abject failures at their own profession they were. So, let me point out the obvious, just as I had to do back then.
First, let me note that BlackRock even manages to see the most obvious correlation with the stagflation of the seventies (a condition that isn’t even necessary but that has suddenly risen all around the world to be as strong now as it was back in the seventies):
The last time a major supply shock drove up inflation was in the 1970s, when an oil embargo by producers triggered a spike in oil prices. Today’s oil price surge naturally raises the question of whether the economy is headed for 1970s-style stagflation, a period of high inflation coupled with weak growth.
The oil/energy crisis is already massive and global: (Just because it has not fully hit the US yet, does not mean it is not very bit as huge as what was seen in the seventies … or even worse.)
Power shortages are turning out streetlights and shutting down factories in China. The poor in Brazil are choosing between paying for food or electricity. German corn and wheat farmers can’t find fertilizer, made using natural gas. And fears are rising that Europe will have to ration electricity if it’s a cold winter.
The world is gripped by an energy crunch — a fierce squeeze on some of the key markets for natural gas, oil and other fuels that keep the global economy running and the lights and heat on in homes. Heading into winter, that has meant higher utility bills, more expensive products and growing concern….
It’s hitting the Italian food chain hard, with methane prices expected to increase sixfold and push up the cost of drying grains. That could eventually raise the price of bread and pasta at supermarkets, but meat and dairy aisles are more vulnerable as beef and dairy farmers are forced to pay more for grain to feed their animals and pass the cost along to customers.
“From October we are starting to suffer a lot….”AP
The article above goes on to lay out manifold problems throughout the world in supply chains that will result in diminished food and supplies of all kinds already certain for months to come. While some dimwits claim the problem is purely due to high demand (to put a grand spin on it), other writers are smart enough and honest enough to state most of the problem comes from people being unwilling to return to work at ports and in transportation even after extended and enhanced unemployment benefits ended, and due to foreign ports being closed down, and especially due to a longtime and growing shortage of truck drivers.
With energy now in a global crisis, all the ingredients of the last stagflation are solidly in place, except for declining business in the US, according to BlackRock. However, hold on a minute! If you look at US GDP, as I did in my last article, you’ll see that even business is ALREADY rapidly plunging, too, leaving BlackRock’s statement that we don’t have stagflation because business is booming a projection without the support of a trend:
As a reminder, here is what I wrote about the actual trend last week,
To see proof that we are entering the stagflation I said this would turn into, let’s look at how Goldman Sachs has also revised its predictions for economic growth (annualized as what it would be if it held at that quarterly rate for a year):“This is Stagflation, and Here is an Easy, Practical Idea to Prep for it“
- Prior to July, GS’s forecast for the second half of 2021 was +9.5% for Q3 and +6.0% for Q4.
- In late July, GS revised its forecast down to +8.5% for Q3 and +5.0% for Q4.
- On August 18, GS revised its forecast down to +5.5% for Q3 but raised its Q4 prediction to +6.5%.
- Last weekend, they revised Q3 down again to +4.5%, and decided their previous upward revision for Q4 was bassackwards and dropped Q4 to +5.0%.
- Finally, this weekend GS cut its GDP growth forecast to +3.25% Q3 and +4.5% Q4.
Plunging week to week by that much, it seems Goldman’s number runners just can’t keep up with the nation’s speedy decline. The Atlanta Fed predicts much worse. Now at a pre-recessionary 1.3%, the Fed’s predictions have plummeted continually as you can see:
Merely a nip above recession.
With so much evidence that GDP is declining faster than one can keep up with the fall, BlackRock is without excuse for failing to see the decline. In fact, a much broader array of bad conditions is in place than existed in the seventies. Yet, BlackRock predicts central banks will (and should) help save the day, even as they admit there really isn’t anything central banks can do about all of this:
We believe central banks with credible inflation frameworks will largely look through the restart price pressures – and avoid a premature tightening that hurts growth but does nothing to address the bottlenecks.
The fact is, nothing central banks do can address the bottlenecks, and the fact is, as I also pointed out in that last article, the Bank of England and European Central Bank have already started tightening, and the Fed has already indicated it will start to reduce the amount of slack it is creating in the system in November or December.
BlackRock’s ability to see everything around them but completely inability to understand what it all clearly means almost implies something darker than mere opacity of thought. Do they have a book of goods they need to offload to retail investors whom they need to energize in order to have a ready market to sell into? I don’t know, but I cannot explain, otherwise, how their economists can fail to see rapidly sliding GDP projections that others in their profession are reporting. Even if you grant them excuse for that particular blindspot, they cannot be excused for believing business will continue to boom just because demand is remaining solid! Continuing solid demand in the face of failed delivery of goods and services only assures that inflation will continue to boom, not GDP and not business. You cannot sell what you don’t have! You cannot sell what you cannot transport to market either.
On the basis of this obvious and rapid deterioration in GDP due to globally gargantuan supply-chain troubles and clear evidence that there is little to no hope of that reversing for months to come (for the reasons I and the videos below are about to remind people of), I predicted “What few of the gurus are telling you, which I will, is that we’ll be in a recession by sometime this winter.“
The winter of our discontent is already forming
Winter’s business chill is already here and is being reported everywhere. There is no excuse for being oblivious to something so obvious.
We all know at this point that supply-chain problems are increasing, not shrinking. That is what I claimed without hesitation over a year ago we would most certainly see. We also KNOW central banks can do NOTHING about that. Creating money won’t solve the supply-chain issues, it will only increase the prices for scarce goods. One of the big broken links in the chain is enough truckers, but President Biden already made absolutely certain that thousands of truck drivers will be fired in December for their refusal to get vaccinated, and truckers overall are not likely to be strong-armed by liberal presidents.
BlackRock notes the problem but denies its significance:
Supply capacity has been slow to come back online, resulting in bottlenecks and price pressures. Second, growth has room to run, we believe, with global activity well below its long-run potential. Supply will eventually rise to meet demand, instead of the 1970s experience of demand going down to meet supply.
Sure, supply will eventually come back online to meet demand, but when? As the last video above notes, if everyone does their best in a perfect world, the problem will not be resolved until the second quarter of next year! That is in an ideal world, best-case scenario. What likelihood of that is there in this new COVID world a a plague of surprises every quarter and in which politicians are deliberately adding to the wreckage with new vaccine mandates that will shut down hundreds of thousands of individual workers?
Even if those mandates do not make the problem worse (extremely unlikely), you’re going to see more empty shelves, more restaurants that cannot cook meals for lack of a few key ingredients; and the problem will not resolve until the second quarter of next year, at earliest, leaving businesses in the red well beyond “black Friday” if they cannot deliver the goods. Demand remaining strong will not solve the problem of more businesses failing because they don’t have enough products on their shelves or enough key ingredients for dinners to put on their tables. It will exacerbate it. It will make those things that are available cost a lot more, but it won’t do a darn thing to get more truckers vaccinated and on the road or more trucks built for them to drive, and more containers unloaded from ships at the docks and more ships moving away from ports.
In fact, when the president and the Port of Los Angeles announced a deal to start running the port around the clock, I could only say, “Well, that sounds nice, but where are you going to get all the extra workers needed to fill those extra shifts when you cannot fill the shift you already have, and where are you going to get all the extra truckers to haul those extra loads that are processed if you do miraculously fill entire extra shifts, and HOW MUCH extra are you going to have to pay in order to entice so many people into those newly created positions, amplifying the cost of goods sold? Especially when you are about to vaccination vacate nearly 10% of the workers you already have???
Is there no sense left in this world at all?
These vain promises are just like our pledge in the US to change to all electric cars by 2025. Where is the all-electric electricity going to come from with California going into brownouts already due to wildfires, hydro reservoirs running critically low already in the West due to drought, and Texas going into brownouts due to a single pipeline shutting down in a cold winter. Add to that the energy crisis building all around the world already, and how are you going to power those cars? Much electricity still takes oil. It sounds to me like our central planning means we are going to have a lot of cars that cannot move off the car lots due to electrical brownouts becoming blackouts once those cars start hitting the roads in greater numbers.
So, you have to think brighter than the low-wattage bulbs that put the “black” in BlackRock. The supply-chain breakdown all over the world not only raises prices due to shortages, it also assures that “booming business” will rapidly implode, not due to lack of demand, but due to inability to get things produced and inability to get the things that are produced to market. It doesn’t make any difference how strong demand remains if you cannot produce to fill that demand or cannot ship what you do produce to customers in order to make money off that production.
All you have, in that case, is costs and backups, so production will quickly be turned back down because product cannot be moved out of factories, nor resources moved in to make products. Sales will decline rapidly for lack of supply, which is already so apparent on shelves in numerous stores that it is stunning that someone at BlackRock cannot see it coming when it is ALREADY HERE! I suppose that is because they have people who do the shopping for them. Obviously, their name speaks to their opaque nature.
The result is clearly that the economy stalls because things are not MOVING. And “not moving” is the very definition of “stagnant” — “having no current or flow.” When blockages to flow all happen on the supply side, as is now already the case, that is also the very formula for high inflation, especially if central banks do as BlackRock says would be wise to do, which is to keep up their financial largesse! Too much money chasing too few goods! Great! Let’s print even more of it, knowing full well it cannot solve the core problems. What it really all adds up to is a GUARANTEE OF stagnation because nothing is moving, so nothing can be sold. And you have guaranteed inflation. That’s STAGflation by definition.
If you think it isn’t already building all around you in ways that far exceed the seventies, you need to get out more often or look beyond your narrow enclave because some shelves are already going bare in stores everywhere, and the holidays haven’t even begun. How many businesses will rapidly close down if they cannot get the goods to sell? How many producers will cut back production within a quarter if their production from this quarter doesn’t MOVE?
How can the people of a major investment company miss the writing on the wall when it is writ so large? It has to be denial, at best, or outright deception at worst. I’ll let you decide what BrainRot’s excuse is. I claim no knowledge of that; I only point out that it looks terrible on their part either way.
To the extent that you don’t see inflation information in the bond market, ignore the bloody bond market!
The bond market knows nothing right now. It has been rendered brain dead by central-bank lobotomy even though people in the market know exactly what to expect with inflation. That is because the Fed’s interference has chopped the bond market’s head off. So, the thinking part in the market gives no direction to what the flailing body does. Here its how that works and reason to believe a lot of horror will strike sometime after Halloween, especially as we observe with BlackRock how the big boys don’t have a clue about the obvious:
The Fed wholly owns the treasury bond market. Period. It currently buys up more than half of all US bond issuances, and it has been doing that for a year-and-a-half across the full maturity spectrum. As I have pointed out repeatedly, that makes the Fed THE price-setter of the bond marketplace. It means treasuries have NO ABILITY to convey accurate inflation pricing information because they sell at the yield the Fed determines for each maturity level by soaking up whatever it takes from each maturity level to maintain the yield curve within a range the Fed wants to allow.
That’s called “yield-curve control,” and it’s something I warned my patrons we’d see coming from the Fed many, many months ago. The Fed began, not long after that warning to engaged in yield-curve control without any overt word about it, which it has done for well over a year. If the Fed doesn’t like the yield on bonds at one point on the maturity curve, it will buy more bonds at that point and less at others. Simple. It doesn’t have to announce it is controlling the yield curve in order to do it.
WHEN THE FED TAPERS ITS US TREASURY PURCHASES, it will also be tapering its control over treasury pricing. Treasury pricing has a strong impact on all bond pricing. So, as the Fed relinquishes its control over US treasury pricing by backing out of that market, ALL bonds will start to more accurately price in inflation. For now, the Fed is holding back the tide, and it is big enough to do that; so, there is no true price discovery in the bond market. However, real inflation, regardless of what bond yields/prices say, is forcing the Fed to pull away. As it does so, the game is going to get real again over the next half year, and that is going to be UGLY!
Prediction: To the extent the Fed actually follows through with pulling out of the treasury bond market, the whole bond market is going to get ugly. However, to whatever extent the Fed chickens out because of how ugly things are getting, it assures inflation will keep getting worse. We’ll likely start to see that struggle by the end of this year and certainly by the first quarter of 2022, BlackWatt’s dimwits not withstanding.
While some of those in deep denial of reality said last spring that inflation could not possibly be happening in any significant way because bond prices were not falling (yields rising), those same restricted thinkers said last spring that inflation couldn’t possibly be happening for another reason, too, much less run hot, because copper prices stopped rising in the late spring and started to fall (put in a top).
I responded at the time that there is no straight line to anything in either economics or markets, and copper was merely taking a rest after a dizzying climb. Nearly all commodities, copper included, have been on a tear ever since. Once the Fed stops controlling bond prices, they will plummet as yields rise to reflect the inflation that is really happening in commodities, which go into everything, affecting consumer prices down the road. For now, bonds are in bondage, held there by the Fed.
My next patron post will go into greater detail on the specific shortages that are already developing and what to look out for.
Protected: THE ECONOCRISIS (Part 2): Energy Shortages, Everything Shortages Assure Abundant Inflation and Stock Troubles
In an effort to prove the Fed’s tapering won’t matter, I recently saw one stock advisor claim that, when the Fed tapered its QE from late 2015 into 2016, “the stock market rallied 60% in an almost straight line higher.”
Wow! Let’s take a look at that! Here is what the stock market actually did from the last of half of 2015 through the first half 2016:
Apparently, any misrepresentation of history will do in order to try to maintain a long-lost argument. When the Fed tapered its stimulus, the bull was lying on the ground, panting and dripping with blood like it had faced a great Spanish matador. A look at the facts above will show you that from the latter half of 2015 through the middle of 2016, the market went absolutely nowhere! In fact, it went nowhere throughout the Fed’s full tapering period (assets and ZIRP stimulus) with a great deal of lunging and stumbling just to get to nowhere.
I presented only the part of that “tapering” period shown in the graph above because I wanted to focus the graph specifically on the false claim made above. A broader view would show that in late October of 2016, you could have bought in at the same price you sold out for at the start of 2015.
Only the Trump Rally brought life back into the wasting bull. When Trump got elected in early November, 2016, everything changed because of his promised massive corporate tax cuts that would put enough cash back on the corporate board-room tables to offset all of the Fed’s tapering. (But this time Biden is promising to take most of that bottom-line cash back off the table at the same time the Fed tapers! Not a good combo for the market.)
It’s a shame when narratives that are proffered to support positions that have been wrongly argued have no basis in truth to the point of even trying to rewrite obvious historic facts.
Now, maybe you are generously thinking, “Perhaps it was much better for the roaring NASDAQ.”
It was much worse! The NASDAQ crashed almost 20% from its last high. In fact, it came within a hair of being an official bear market, and it didn’t recover from its deepest low for more than half a year (when the promise of the Trump Tax Cuts changed the calculus for the anticipatory stock market.)
This is an example of how writers who don’t care about full truth can cherry-pick one little part out of a period to say the market did fantastic during the Fed’s tapering. Clearly, there are some steep slopes of short duration during the period the writer defined where the market did rise a lot. However, when you see those rises in context, you can immediately tell the market was merely rising out of an equally large hole it had just plunged into, and it didn’t even make it all the way out! In fact, it rose from one crash only to plunge back to a deeper level and then partially recover to a lower high from which it continued downward. In fact, the market was a train wreck for the entire QE/ZIRP wind-down period, and the worst of that period happened in late 2015 and then again in early 2016!
At no point, however, did any of the major indices show a rise — even during those short recoveries from bearlike plunges — that came anywhere near 60% or a straight line! (More like a 20% rise, but only to fall again.) So, the writer above went far from just playing loose with the truth, and that was tapering (of asset purchases in 2014 and ZIRP at the end of 2015), not tightening.
The entire period (red arc) after the fed finished tapering its asset purchases through its move out of zero-interest-rate policy, looks like this:
That is what HISTORY says you can expect from Fed tapering — a train wreck! But, today, the Fed is talking about speeding up tightening, too, with interest hikes to immediately follow the tapering. (They’ll never get that far, of course, but the Fed will wreck a lot of damage trying.) During actual tightening in 2018 the market did much worse, even with the help of those tax cuts because the tax cuts could not overcome the new downdraft from the Fed to such a point that Trump kept harping at the Fed to stop tightening. This is what history says you can expect from actual tightening:
Not a pretty year. From the time the Fed doubled down on its initial slow tightening rate near the end of January, 2018, to the the end of that year, the market experienced nothing but peril to end the year well below both its January high and its 2018 start.
Those who want to maintain their denial about where Fed actions will take us might try to counter these historic patterns by pulling out the tired mantra “but this time is different.” To which I will respond, “Yes it most certainly is! This time is FAR more fragile and far more likely to face great disruption due to the severe global disruptions I laid out in my last two articles that are already happening (“Shortages and Inflation Are Ripping the World’s Face Off” and “Stocks and Bonds Starting to Tussle“).
In my next article, I will be laying out greater dangers that are developing just as the Fed plans to start to taper. In essence, the last time the Fed was tapering it was because it appeared its Great Recovery had been a success. This time the Fed is advancing its tapering timeline because it is being forced by soaring inflation, not because recovery is complete. That means the Fed will start to taper during a time when an incomplete recovery has left us with high unemployment and as the recovery is already rapidly falling apart under the ravages of inflation and shortages and a continuing pandemic, and when economic damage from the COVIDcrisis remains splattered like blood all over the globe during the onset of a global energy crisis at a time when other central banked are also starting to taper or tighten! And then there are those added pressures governments are putting in place, which I’ll be covering.
And some people think that’s going to go better??? It looks more like planned destruction to me. In fact, I now think the most recent actions and plans of governments and of central banks in the present environment are leading us into global economic collapse.
See you on that in my next article.
The evidence that inflation is ripping everyone’s face off is now widespread, and the situation is rapidly getting worse all over the world, making it harder for both US bonds and stocks to ignore it:
The US stock market took it on the chin again Tuesday, plummeting on worries about sustained high inflation that pushed bond yields higher…. The S&P marked its worst session since May, while the Nasdaq had its worst day since March. For the Dow, it was just the worst decline since last week’s selloff.CNN
It surprises me that, after months of inflation that haven’t abated, I still have to argue with some people that inflation is hot and is not transitory. (Sometimes I even have to argue that it is actually happening, if you can imagine that.) Let me present some of the most glaring examples of inflation that is screaming like a banshee and clearly has been and will continue to be persistent.
September showed us that inflation is already biting into the belly of industrial sentiment and market sentiment. In terms of industry sentiment, a virtual conference earlier this month by Morgan Stanley with industrial CEOs, revealed a broad spectrum of Fortune 500 companies who say they are facing considerable strain in getting enough supply of materials and enough supply of labor and that the rise in costs that come with trying to overcome those shortages has become a serious detriment to business. Then you add to all of that their shipping troubles and rapidly rising shipping/freight costs.
Prices for many basic materials, such as copper and aluminum, are now at or near all-time highs, and industry leaders say they are passing these soaring costs along to consumers.
The lamest argument I battled earlier in year against the high-inflation thesis that I’ve bet my blog on was that inflation cannot be real because it is not showing up in commodity prices. Really? Take a look at the combined core commodities index (the CRB) for the past year, and how it supports what these many CEOs are now saying:
Anyone who thinks commodities are not reflecting inflation has been cherry-picking his commodities all year long! The commodities listed here are core commodities, and their aggregate average has risen a whopping 35% since the start of the year!
The oddest part of the rebuttal to my thesis is that some of the very commodities brought up by the limited few who seem to be baffled by commodities have been the ones that are inflating the worst! Here, for example, is one of the most-watched commodities for gauging inflation — Dr. Copper:
Copper rose to prices that have never been worse!
Now look at this year alone in Aluminum:
What? A 60%+ rise over the course of a year with a consistent trend line isn’t enough to demonstrate the formation of high and persistent inflation with all the things aluminum goes into? Come on! What if I tell you there is only one time in history when aluminum priced slightly higher, and that the past year has shown the steepest rate of rise for a thousand-point climb or for any single year on record?
How much evidence from commodities do some people need in order to see that even their their old-school theories about inflation support a clear trend of high inflation in those commodities that go into everything? Since a few still hold to those dead arguments, I think they lack the intellectual honesty necessary to reach escape velocity from orbiting their own egos as is necessary for anyone to admit they were wrong about inflation or about it being “transitory.” The Fed, of course, is one that has not been able to come right out and admit it was wrong, though it has, at least, given up its tired mantra of “transitory.” To show you how persistent denial can be, just this week, I heard one person say he doesn’t see inflation happening at all. All I could say was that his eyelids must have been Krazy-glued shut.
So, to peel back the glued eyelids, let me present more evidence of how persistent inflation forces have been, starting with steel since it, like aluminum, goes into so many products. Fortune noted last July that steel was already up more than 200% since the COVIDcrisis began, hitting a new all-time high, and asked “When Will the Bubble Pop?” By September 1, however, the bubble was even higher.
Take a look at rubber, which goes into many products. I reported back in July how rubber was melting on the hot road to inflation. As a result of rubber’s rise, tires have been beating a rapid path up the inflationary road, too. General Tire, for example, has not been shy about raising prices. They raised prices 5% last December then 8% in April then another 8% in June and now another 8% in September.
And don’t expect any support for the dishonest commodities argument against inflation from oil, the most important commodity in all pricing — so important that I’ll give it a section of its own:
Oiled up and ready to roll
Some people have argued that the present inflation environment is nothing like the stagflation of the 70s and 80s when I’ve said it is just like that period because “there is no oil crisis this time.” I think they need to be a little less parochial and look beyond their own borders:
While industry-specific headlines have blared “energy crisis” for over a month now, the general public in the UK and other affected places are just waking up to the current energy shortage in parts of Europe and Asia. And many in the US haven’t heard it is happening.…Seeking Alpha
For those who can’t see beyond their own horizons, here is a nice little comparison to the moves in natural gas prices now and in the 70s:
If you lived through the seventies, you might possibly remember these gas lines that went clear around the block:
No, this isn’t Venezuela. It’s England. Take a look as hundreds of Britons line up outside of a gas station in West Birmingham as the nation faces a petrol shortage. #PanicBuyingpic.twitter.com/On2hZzsrMC— Steve Hanke (@steve_hanke) September 24, 2021
Only, as you can tell from the vehicles, those are gas lines in the 2020’s in the UK.
While there is no basis for thinking we have to have an energy crisis in order to experience stagflation and a deep recession like the 70s (as if an energy crisis is the only way that kind of inflation can happen), it looks like we’re going to get the energy crisis, too, just for good measure. (No sense leaving any trouble out of the mix.)
Rising natural gas prices also lead to a rise in the price of that horrible, non-green gas, CO2, because we source much of it from natural gas. That leads to a shortage in fertilizers for food. Because CO2 is also used for food storage in the form of dry ice, the rise in CO2 costs is adding considerably, believe it or not, to the shortages of food on grocery-story shelves. And shortages, as I’ve said throughout the time I’ve been writing that inflation and its effects will be the big financial story of the year, are part of the inflation formula I keep repeating of “too much money chasing too few goods.”
As could be expected from a government official, the UK’s Environment Secretary, George Eustice, assured his nation the present CO2 shortage will have little impact on food prices because food prices are already rising so quickly due to other factors:
He said that while food prices were increasing because of issues including oil prices and labour shortages, carbon dioxide was “a tiny proportion” of overall costs.BBC
Leave it to government officials to not be able to think past their own political agenda. Better ask your local grocer — or a farmer — people who understand food pricing from the ground up:
The CO2 issue has caused a “big supply issue“, one supermarket executive told the BBC. Grocery delivery firm Ocado warned it had “limited stock” of some frozen items.
Surely, “big supply issues” cannot cause rising food prices! Of course, you cannot expect an environmental secretary to understand economics, especially when he has a CO2 agenda to protect. Just as you cannot expect US media to print this information about the cost impacts of CO2 derived from natural gas when they, too, have a CO2/natural-gas narrative to push. So, some of our problems right now are government-created — something I will go into in my next post, which will show how much we are doing to make these problems even worse.
It turns out the CO2 shortage due to the extreme rise in natural gas costs (equally due to gas shortages) may even broaden the energy crisis in the UK beyond petrol and natural gas prices:
The Times reported that ministers were concerned that six reactors might have to close because of the [CO2] supply problems.
Nuclear reactors without CO2 for their cooling systems go boom if you keep them running.
The current energy crisis and resulting food shortages are by no means constrained to Europe:
CHINA ENERGY CRUNCH: The electricity shortages in China are worsening, and widening geographically. It’s getting so bad Beijing is now asking some food processors (like soybean crushing plants) to shut down | #OATT #China #EnergyCrunch with @cangsizhi More on @TheTerminal— Javier Blas (@JavierBlas) September 24, 2021
What do you suppose happens when a nation with billions of people to feed runs low on food and needs more energy to grow, process, store and ship that food? What happens when they are competing against Europe where the same shortages are already coexisting? What will happen as the world’s largest economy joins that competitive crush?
Does that sound like “transitory” to you?
I am beyond certain that the Fed is completely out to lunch on this, and, as a result, the price of lunch is going up even more for everyone.
Maybe some more pictures will help convince those who cannot see what is about to be passed through in consumer inflation because it is already throughout the production and storage pipeline:
Kind of like the highest natural gas prices in … forever.
Of course, besides production and storage, there is also that whole shipping problem that I’ve been regularly covering as a major contributor to supply shortages and inflation. Some of the same ports that are clogged with container ships because nations have shut down ports due to COVID also handle tankers. As I’ve said all summer, the supply-side contribution to inflation from the shipping logjam is certainly not transitory in the respect that the Fed intended you to understand “transitory.” It has only gotten worse all summer long. It is transitory only in the sense that, like all things, it will eventually end. It’s probably not eternal. Few things are.
But also don’t think the energy crisis in Europe (soon to come to a shore near you if you don’t live near a European or Chinese shore) is relegated to just petrol because, remember many electrical generation plants run of natural gas or diesel and then there are those darn reactors. As a result, electricity prices in parts of Europe now look like this:
What happens when winter hits?
Those electrical prices are not only higher for consumers at home; they means the products they are about to buy, being made with that electricity will be higher, too, if they ever arrive at port or escape their containers in port. And you cannot say, “Well, that’s only France.” Remember Texas a few months back? California? Nothing has been done to correct the problems that caused those massive electrical price increases and brownouts.
Could be a cold winter in Europe.
Could be a cold winter in the US, too, as shortages in a desperate Europe and China lead to increased exports of crude and its byproducts from the US, forcing domestic prices to compete. This story is only just getting warmed up.
Inflation will soon get a raise
While wage inflation has been noted throughout the last several months of this year, it has finally proven it is definitely not a transitory factor. Obviously, wages that rise are not inclined to come down easily, so I’m not talking about that well recognized reason that rising wages are not a transitory force for inflation. I’m talking about the excuse used all along for discounting wage inflation, which was that, when all the government augmentation of unemployment benefits ended, the vast horde of unemployed would finally go back to work, so pressure on wages would go away.
It ended, and they didn’t. One reason may be that, for many, those unemployment benefits were replaced with semi-universal basic income in the form of government payments per child for those with children, which isn’t about to end.
Wage inflation is particularly sticky, which is why policy wonks, who wanted to sell their massive corporate tax cuts after they became law (to make them easier to defend down the road), convinced corporations to give one-time bonuses to assuage the masses, not wage increases. That happened because most of the tax cuts went to dividends and stock buybacks, as I argued they would, and, thereby, made up for the Fed’s tightening for awhile so that stocks kept climbing on this replacement fuel. A number of corporations did give one-off bonuses of $2,000 as window dressing to placate the dwindling middle class. If they gave it as raises, they’d be stuck with paying sharing the money for years to come.
However, a new day has dawned for labor. Workers feel empowered by the past year of enhanced unemployment benefits and by gains they made from retail investments in stocks, so the wage-raise train is now coming into the station.
Many boomers also retired early, and others still don’t want to come back due to COVID concerns, which leaves the labor market in extended short supply, regardless of unemployment benefits, giving more leverage to the younger of the generationally-defined people groups.
Here is what happened to the baby-boomer work force as soon as the COVIDcrisis hit:
They ran from the labor force and retired. Being over 65, it is safe to say almost no one who was part of that huge surge in retirees is coming back.
As I said near the start fo the COVIDcrisis, we’ll only know the economic damage from the forced COVID closures when we find out months down the road what didn’t return after the economy reopened. We are now there. The knowing is upon us — those laborers above being one example of what is not coming back on.
Major shutdowns work like this as an analogy. A well-known with shutting down a large factory is that not everything starts back up. That is even more true when shutting down a large national economy. More so yet, when shutting down all large economies around the world. Not everything that gets turned off with a switch comes back on with a switch.
The above graph represents a permanent change in the labor pool. These retirees were going to quit, regardless, but the COVID closures brought many retirements forward in time all at once, making COVID an accelerant for an already growing demographic problem.
Rising wages have always been one of the most problematic causes of inflation. While they are great for workers, a good part of the increased labor costs does get recycled back to everyone. That cycle keeps getting priced in as further wage increases to keep up with the cost of living, causing more future inflation. It’s a tough cycle to break, making it one of the most persistent causes of inflation once the cycle begins.
The most successful way corporations have fought wage inflation has been by outsourcing US jobs to other nations. Not only has that become increasingly unpopular in both parties (deservedly so in my opinion), but it has become increasingly difficult to pull off now that shipping lanes are jammed up due to port closures. Supply lines have busted to pieces causing many corporations to rethink their outsourcing because factories in other nations are sporadically shut down due to COVID. Trade with some regions is sometimes banned due to COVID concerns and in some places curtailed by the leftover impact of trade wars. Outsourcing labor is simply not the breeze it once was.
Millennials and Gen Z are also looking for new options. They have different core values, such as being able to work from home, which corporations are having to adapt to. Working for companies that are environmentally friendly, for example, is a larger core value, and that is not something some companies can due much about.
These are all demographic changes that are not going away as a result of reopening. The decades of low wage increases (and therefore low inflation due to low wage pressure) may have ended with COVID as the catalyst for change.
Housing inflation about to raise the roof on CPI
While housing counts for about 30% in the consumer price index, it has barely begun to show up in the official CPI numbers because it is based on homeowner guesses about equivalent rental rates, not actual home prices, and it is inputted in a way that causes a large lag time. According to Apartment List, rents this year have gone up nationally by 16.4%, and they are still rising faster than they rose before the pandemic, but CPI reflects very little of that … so far.
You can see in the graph below how CPI’s category for housing prices (Owner Equivalent Rent — OER) tracks with actual rental rates with about a four-month lag time. You can also see how much that means OER has yet to catch up with where rents have already gone over just the next four months:
That is rental inflation that is already in the bag, not projected, but it is not, yet, factored into CPI, misleading us to believe inflation is lower than it really is. It will be. To some extent, the government will likely find ways to “adjust” the numbers down with seasonal excuses, etc.; but they won’t be able to adjust them as much as they are about to rise and convince anyone they are doing anything other than lying. So expect the official CPI numbers to start catching up over the next four months.
Moreover, at a time when rents typically drop due to seasonality,
rents are continuing to grow at an unprecedented rate.Apartment List
And, in spite of rental forbearance on rents making it hard for landlords to raise rents on existing renters,
2021 has brought the fastest rent growth we have on record in our data.
While the end of mortgage forbearance, which Biden extended until the end of this month, may bring home prices down as foreclosures start to appear and add more inventory to the house market, the new rules for foreclosures coming out of forbearance require banks to wait ninety days to start a foreclosure and require them to ascertain any house being foreclosed has been vacated before starting. These rules remain in effect until January 1, 2022. So, relief for housing prices will not come in time to make any difference on what is already waiting in the pipeline to be reported as establish inflation facts for, at least, another six months.
It is also possible that most homeowners will become more aware of the rise in housing costs as they refinance at the end of forbearance and start giving higher estimates to the BLS as to what they estimate their house would rent for. Part of the lag between actual rent increases and CPI is due to how long it take homeowners, who are not paying rent, to realize what is happening in rents around them, which they never do, as a group, fully realize.
It is also reasonable to extrapolate that those owners who do not come current on their mortgages and who are eventually forced out of their homes will increase rental demand, pushing rents even higher even faster.
Even if none of those likely possibilities play out, one thing is certain: the past four months of rent increases were the worst by far, and they are just about to start getting reported in CPI in the months ahead, and rents are still rising twice a quickly as normal.
Oh, but it gets worse, rental forbearance, extended illegally by President Biden according the Supreme Court, was struck down by the Supreme Court at the end of August. The evictions that will come from that have not even begun to happen, and those evictions will force renters to find rentals elsewhere, now at much higher prices. So, at about the same time previous homeowners are looking for a place to rent evicted renters will be looking for a place to rent.
How can forced evictions not push rents up? Rents were effectively frozen for those who chose to enter forbearance because raising rents during forbearance would have just resulted in more renters choosing forbearance. For landlords that presented a high risk of getting no rent at all if they tried to raise rents on existing renters, so new rents would have tended to rise only for new renters. As evictions again become possible, that constraint will fade away.
We’re talking millions of people who will soon be emerging from these protections. To be sure, all of this will be mitigated by future government programs intended to soften the damage with bailouts, etc.; but not all of those intentions will make it through congress, so all of this represents higher upward pressure and turmoil for months to come. It’s just not clear at what level or with what timing it will all play through as the government continues to try to find ways to delay it all.
Much interest in higher interest
Years of extremely low interest rates set by central banks all around the world have enticed nearly everyone and every corporation and every government into extraordinarily high debt, far beyond any historical norms, and now interest on treasury bonds is rising, and that affects interest on home mortgages. Once the Fed starts actually tapering its own bond purchases, that’s not going to go well.
The Bank of England has announced it will soon start moving its targeted short-term interest rates up for the UK. The European Central Bank has said it will taper its purchases of securities, creating an environment that is sure to raise rates. These two have merely gotten a slight head start on the Fed, which has more than strongly indicated it will taper security purchases sooner and raise interest rates sooner than it had indicated back in the days when it claimed inflation was transitory. The Fed has started to backpedal on its earlier claims with statements like “not quite as transitory” or Powell’s most recent statement before congress:
“Inflation is elevated and will likely remain so in coming months before moderating.”CNN
“Transitory” has subtly shifted to “is elevated and will likely remain so.” An indiscriminate number of months is, of course, safe. “Months” can easily become twelve months, and a year can become two, so let’s focus on “elevated and likely to remain so.”
In fact, Powell even added,
“The supply-side restrictions that are so much at the heart of the inflation we’re seeing … in some cases they’ve gotten worse.”
As I was saying they would from the time the Fed started making its “transitory” argument,.
As I wrote on Monday, the Fed’s hints now at moving forward its bond tapering and interest hikes (actual tightening of monetary conditions) were already causing a daily anticipatory rise in US treasury yields. I referred to it as an anticipatory foreshock in the stock market. A much larger shock came less than twenty-four hours after I published that on my blog. (See “Stocks and Bonds Starting to Tussle.”)
These bond rates will likely ebb and flow as we remain in anticipation mode about when the Fed will actually start tapering and how quickly and because the Fed still wholy owns the US treasury market until such time as it does taper, so it can reset rates where it wants them. Tapering means giving up that direct market bond-market interference.
Another argument against my high-and-persistent-inflation thesis has been that the US dollar is not falling in value on the dollar index. In the present environment of global economic self-destruction that old-school thinking doesn’t apply. The US dollar is measured in the dollar index relative to other currencies, so whether it rises or falls says as much about the rest of the basket of currencies as about the dollar.
Now that the Fed has joined the currency chorus in spirit with Europe and the UK, the dollar’s value has actually strengthened against those other currencies because raising interest rates increases demand for the dollar, and the Fed’s slowing of its treasury purchases will effectively raise interest on bonds because the government must attract other lovers who will not be as loose the Fed. Back when it appeared the Fed would be slower than some central banks to taper its bond purchases and to raise interest rates, the dollar was falling against those currencies.
It is now anticipated that European inflation will come in for September at a 13-year high. In the US it is already much worse than a mere 13-year high.
Sentimentally speaking, breaking up is hard to do
My claim for the past year has been that inflation will rise so high and so long that eventually it will kill the stock market bull (i.e., will cause, at minimum, a 20% crash into a bear market, though I think it will eventually be down by more than that). It will do this one of two ways by impacting investor sentiment because it forces the Fed to tighten sooner and harder (as we’re starting to see), or it will kill the stock market bull by killing the economy all around it with crushing cost increases (as we are also seeing). The longer the Fed delays its tapering, the more inflation will accomplish the latter. The Fed easing, instead of helping the economy at this point is killing it with kindness, making it easier for workers to stay away and easier for everyone to bid prices up on short supplies. The days when the Fed can help with loose money have finally reached their natural end.
We can now measure just how much these inflation/tapering concerns are starting to eat into the soft underbelly of bullish investor sentiment. IHS Markit presents the following survey:
This comes from investment managers’ statements about their own (and their client’s) sentiment.
The darkening picture of market sentiment is signaled by IHS Markit’s new Investment Manager Index (IMI) monthly survey, based on data from a panel of 100 institutional investors employed by firms which collectively represent approximately $845bn assets under management…. However, recent months have seen the survey indicate a cooling of investor sentiment from peaks recorded earlier this year, with strong risk appetite seen in prior months almost evaporating in September, accompanied by an increasingly bearish near-term outlook for equities…. The survey’s Risk Appetite Index fell from +14% in August to +1% in September, barely above the zero level that separates risk tolerance from risk aversion…. At the same time, the survey’s Expected Returns Index fell from zero in August to -12% in September, meaning more investors see returns falling in the next 30 days than anticipate a rise.Seeking Alpha
As a result of waning investor sentiment, the stock market has refused to close north of SPX 4600 for almost a month now. It has made significant efforts twice since the start of the month to recover its previous high around 4550 and has failed well short each time. During this time the main debate in financial headlines has been over how quickly rising inflation will force the Fed to start tapering its high levels of stimulus and to tighten interest — the very thing I said many months would come into serious play against the market for the simple reason that inflation would not let up until it did. While all that seems obvious now, just remember it was far from obvious when I bet the continuance of writing for my blog on it. Nearly everyone was parroting the Fed’s words about inflation being “transitory,” but I’ve held to my guns.
The stock market and Fed largesse during the COVID period have remained nicely married:
Their breakup will not be so nice.
The environment we are facing is not a very pretty one. The world is in substantial disequilibrium. Markets are in various states of distortion all over the place…. Global debt has grown massively. One reason: the largess of the Federal Reserve System. It is hard for anyone to see how we can grow our way out of this burden…. So, the stock market did not have a very good week. Maybe there is a good reason why it did not.Seeking Alpha
As I’ve written about extensively, we know the Federal Reserve has painted itself into a corner where it is now pressured to start tapering its quantitative easing earlier than it had been indicating. Now we are seeing signs that the bond market isn’t liking the news out of the last FOMC meeting, which hinted strongly that the Fed will start to taper its massive purchases of US treasuries this year.
US bonds soon to be released from Fed bondage
US treasury auctions roiled with signs of trouble today. The 30YR UST spiked above 2%, it’s highest yield since mid-summer; but, more importantly, the 10YR did a similar move, rising to its mid-summer high above 1.50%, while the 2YR hit its highest level since March of 2020 when the COVIDcrash began.
At 1.5%, you can see (in the top graph below from three days) that 10YR treasuries have today just poked their head above the upper bound of their recent trading range, indicating a possible breakout:
These bits of bond turmoil are minor foreshocks of what will come in the months ahead. While they are not the real bad news that my next article will be laying out. the biggest bit is that bid-to-cover in the 2YR auction crashed from 2.649 to 2.28, which is the lowest it’s been since the Lehman collapse in December of 2008! (The ratio by which the number of bonds bid exceeded the number of bonds issued.)
As a result, primary bond dealers were left holding a third of the whole issue, which is the worst in almost a year for dealers. This sudden flight in demand suggests fears are setting in about Fed tapering (not even tightening yet), which will cause bond yields to rise more, making today’s bonds worth less down the road.
While bonds already have a long way to move just to properly price in today’s inflation, they have much further to move to price in tomorrow’s. However, as I’ve pointed out before, the Federal Reserve currently owns (as in controls) the yield curve of bonds (the curve along which treasuries of different maturity dates price their yields) because it has been soaking up more than half of all US treasury issuances as soon as the primary dealers buy them.
That, however, will slowly change as the Fed starts to taper back its purchases, leaving it with less and less control over yields with each targeted reduction in purchases until it has none (if it gets to the point of fulfilling its taper promises). The Fed has hinted it intends to be out of purchasing bonds by the middle of next year. So, you can expect bonds to become more realistic in what they telegraph about inflation expectations as pricing starts to become market driven and not entirely Fed controlled (in that he who continually buys and holds half of any market is the market price setter).
In other words, bonds (especially US treasuries) in the months ahead are about to escape their Fed bondage. That untethering will leave them increasingly free to price to real market concerns. Currently, that means old-school analysts who try to gauge inflation based on what bonds are doing have completely missed the train because the bond market currently allows zero price discovery so contains no inflation pricing information at all. (I explained all this here back in July for those who have no idea how the Fed has erased all price information from the US treasury market.)
The US treasury market prices wherever the Fed decides it will at each point along the maturity curve because the Fed controls how much of each maturity it will buy and is buying full-spectrum. When you are soaking up half of all government issuance, that’s a lot of price control. Want lower yields at one part of the curve? Buy more at that maturity date and less along other parts of the bond maturity spectrum.
Therefore, even the idea that the yield curve has to flatten to reveal a coming recession has nothing to do anymore with current or even future reality due to the Fed’s intense yield-curve-control, which I warned my patrons more than a year ago we’d see coming as part of the COVID interventions. You have to learn how to think outside the box when the Fed is taking actions that are completely outside the range of anything ever seen. Yield-curve control has been here since COVID was just getting started, and still no one is talking about it. It’s actually impossible that a single entity can buy up half of all treasuries issued and not have a major suppressing effect on treasury yields. So, where you buy along the curve sets the curve.
The market appears to be trying to price the inevitable asset adjustments in ahead of the Fed’s moves, but keep in, mind, the Fed is still wrestling the treasury market to where it wants it to be, and will only gradually release its grip. No actual change in Fed actions has happened, but the market appears to be starting to anticipate the moves … maybe (as everyone seems a little slow to figure this out).
Stocks may enter bondage to the bond market
As the Fed does start relaxing its white-knuckle grip on the treasury market, you can expect to see stocks struggle more against the current of money that will eventually flow into bonds with higher yields. We may be seeing a hint of those worries pricing in now, too. That’s just one way inflation will eat into the stock market this time by forcing the Fed’s hand. We haven’t seen anything like this because we have not seen any situations where the Fed was already engaged in massive easing as the economy began to collapse and the Fed began to withdraw support from a dependent market just as the collapse began because its hand was forced by relentless (and growing) inflation. (My next article will deal with how the shortages that are part of the inflation equation are about to get MUCH worse. They are not transitory by any means.)
Stocks did better last week than ignore the Fed’s gentle bond tapering hint, but the bliss that comes from momentary relief seems to have been short-lived. Today, the market began to struggle as bonds began to show an attempt at wresting themselves free of Fed control. No big action, and this isn’t the big news of the day or the disintegration of the stock market I said inflation would eventually bring, but market breadth (number of stocks moving upward v. downward) has been deteriorating for months as concerns gnawed away at the market over how inflation might not prove so transitory (it hasn’t) and might push the Fed’s tapering forward (it has). Likewise if you measure breadth by the number of stocks still trading above their 50-day moving average versus those trading below:
The picture of where stocks are trading relative to their 200-day-moving average looks much worse:
That continually decreasing breadth indicates fewer and fewer investors are participating in or believing in the bull, and that makes each attempt at a new climb more difficult. While there has been a lot of bull in the market over the past year, the misguided optimism is finally fading.
Stocks made another slight dip again today.
The S&P has been struggling throughout September with worries appearing in frequent headlines from analysts about how inflation will force faster Fed tapering. So the market was worried something worse than the Fed actually announced might be forthcoming. As you can see, it struggling two weeks ago to find its way back toward 4550, and failed, and it looks like its latest attempt last week failed at a slightly lower level:
Put another way, that looks like this:
Because the Fed was as dovish as it could possibly be in how it presented its tapering news, the market, at first, appeared calm and took some lift from the fact there were absolutely no surprises from the Fed. However, a little reality may be denting delusional sentiment, and there is a whole LOT of bad reality to come in the month’s ahead, as I am writing starting to write about now.
Again, to be clear, I am not saying this it the point at which the market will fail due to inflation forcing the Fed to tighten, as tapering is still a long way short of tightening. However, we continue to have clandestine tightening going on in the background.
Reverse Repo Crisis Building
Because the Fed is injecting too much liquidity into financial markets in order to keep funding the government’s extraordinary stimulus, such as those checks now going out to families with children, it has had to secretly suck money back out of the system via reverse repos on the banking reserve side where “money” was forming a logjam. (See where I wrote about this secret sucking here.) This is the exact opposite of the Repo Crisis that I warned of in early 2019 and covered extensively when it finally started to unfold in the second half of 2019.
I don’t think the risks from the Reverse Repo Crisis are as crisis-like as what we saw in 2019 in that the historically extraordinary level of reverse repos should start to back down when the Fed finally starts backing off its tapering. Rather, I present them as solid evidence of just how much the Fed’s money printing is not needed in the financial system and has nothing to do with setting financial policy, and how the Fed is being forced to tighten (even if out the back door through Reverse Repos). The Fed is having to mitigate the negative side effects of “financial policy” that has been running way too loose for way too long because the Fed fears backing off, lest it crash stocks, bonds and, as a result, the economy and the everything bubble and causes the government to pay more interest than it can manage.
Think of reverse repos as back pressure. The Reverse Repo Crisis is one of the ways in which we can see the Fed is being forced to taper, and here what that evidence now looks like:
That mountain that is pushing rapidly toward 1.5 TRILLION dollars that the Fed is sucking out of the financial system EVERY DAY (as in rolling it over and seeing it build) is a good proxy for how much extra liquidity they have sloshed into the system. These are funds banks don’t want to keep in reserves. You can see there were almost none of these operations happening when the system was too tight in 2019 and were only a small amount by comparison in prior years, but I suspect we’ll easily hit 2 trillion dollars in overnight money-sucking by the end of the year before tapering begins to dwindle this back down sometime in 2022.
Those overnight repos are, in essence, tightening that is happening down in the Fed basement (see referenced article) as the Fed keeps adding in money at the other end of the system. It is money banks can’t even find a way to loan out at today’s extremely low interest rates. If the Fed didn’t suck it out, the Fed’s primary interest rate would actually go negative, something the Fed wants to avoid.)
They may also be a way the Fed is preparing to ease the shock of tapering, as it can reduce its reverse repos as it tapers the liquidity injections of its bond purchases, keeping net liquidity constant for awhile, but I am not counting on that being as “boring as watching paint dry.” Not in this acid environment that I will be describing later this week.
Inflation is now rising faster than anything IHS Markit has ever seen in its Purchasing Manager’s Index, but it gets worse: It is not just cost outputs to consumers that are being passed along, but the rise in new input costs has also picked up pace. That means even higher price increases are building up in the backlogs of products yet to be shipped or even in some yet to be manufactured.
On the price front, input costs rose at a sharper pace during September. The rate of cost inflation was the quickest for four months, and the second- highest on record, as supply chain disruptions and material shortages pushed prices and transportation costs up. Meanwhile, output charges continued to increase markedly, continuing to rise at a pace far outstripping anything seen in the survey’s history prior to May, as firms sought to pass on higher costs to clients where possible.…
Soaring material prices led to one of the fastest increases on record. As a result, the rate of selling price inflation accelerated to the sharpest since data collection began in May 2007 as firms passed higher costs on to their clientsIHS Markit
IHS then gave what is the textbook situation for stagflation:
The pace of US economic growth cooled further in September, having soared in the second quarter, reflecting a combination of peaking demand, supply chain delays and labour shortages. The slowdown was led by a cooling of demand in the service sector…. Supply chain delays show no signs of easing, with another near-record lengthening of delivery times in September. Hence factory output growth also weakened and order book backlogs rose at a record pace in September…. The upshot is yet another month of sharply rising prices charged for goods and services as demand outpaces supply, and higher costs are passed on to customers.
It’s a global phenomenon that holds as true for the UK, for example, as the US where IHS reports,
A fourth successive monthly slowing of business activity has taken the pace of expansion to its lowest since January’s lockdown … while at the same time average prices charged for goods and services are rising at the fastest rate in at least 22 years. The diverging trends of accelerating price rises and slower output growth will add to speculation as to whether the time is right for the Bank of England to start scaling back its pandemic stimulus…. The September PMI data will fuel worries that the UK economy is heading towards a bout of ‘stagflation’, with growth trending sharply lower in recent months while prices continue to leap higher.IHS Markit
US policy and Fed policy obviously cannot do anything about a supply problem that is as true on one side of the pond as the other. Nor can they easily take back the oversupply of money with which they have already flooded their respective financial systems beyond any level ever known in those nations. Of course, the soaring inflation is fed by central banks on each side who have increased money supply as product supply tanked.
And don’t expect any abating of the coronavirus to cause any rapid improvement in the situation either:
The fourth-successive monthly slowdown has occurred despite virus related restrictions being eased in the UK to the lowest since the pandemic began.
And don’t expect that those supply-chain constraints that are causing the shortage component of this stagflation are going away anytime soon, as “transitory” problems clearly have proven themselves to be solidly non-transitory:
And that is why prices, fed by central bank money creation that has already happened, look like this:
Jobs growth meanwhile slowed in September, constrained by worker shortages but accompanied also by a slowdown of inflows of new business to a seven-month low. Business expectations for the year ahead have meanwhile also fallen to their lowest since January, with concerns over both supply and demand amid the ongoing pandemic casting a shadow over prospects for the economy as we move into autumn.
Not “transitory.” Definitely staglfationary.
So, just as central banks may start to feel the need to stimulate their nation’s economies some more, there is nothing they can do that will resolve the economy’s shortages, which means more stimulus will only feed more inflation.
The flash PMI data come at a time when the Bank of England’s Monetary Policy Committee is split on whether the time is right to start considering tapering its emergency stimulus. The further acceleration of price growth will add to concerns that the recent bout of inflation is proving less transitory than many suspected, but the slowdown in growth is a reminder of the fragility of the recovery while the pandemic remains a disruptive force on the economy. The conclusion is likely to be one where policymakers sit on their hands, awaiting further clarity on the growth and inflation outlooks.
Rock, meet hard place.
Moreover, the labor supply side of those shortages, so far, is not improving in the US, even after all the augmented unemployment benefits (which were believed by some, but not me, to be the primary cause of the labor shortages) have expired:
Initial unemployment claims in September actually started rising in each reported week.
An economic crisis is building, and that, too, is …
BREAKING: Live scenes from the Federal Reserve HQ, as they make it rain with liquidity! Printing to prosperity, to infinity and beyond! 🖨️💵 #FederalReserve #QE #Bitcoin #XRP #Gold #Silver #JeromePowell #StevenMnuchin #NeelKashkari pic.twitter.com/g2gLPTyxPb— Marble (@madebymarble) April 17, 2020
Stagflation is showing up in data points and articles everywhere now.
Delta worries, labor shortages and fading Washington stimulus — it’s enough to cast a chill on the U.S. economy this fall.
A bevy of Wall Street forecasters chopped their targets for U.S. growth after a poor U.S. jobs report for August. The government on Friday said the economy gained 235,000 new jobs last month — just one-third of what investors were expecting.
Goldman Sachs, Morgan Stanley, BMO Capital Markets, TD Securities and other firms cut their forecasts — some by more than half.
An economy that was expected to grow at a sizzling 7% annual pace from July through September is now seen expanding at a more modest 3% to 3.5% clip….
The companies that have been hurt the worst during the pandemic — restaurants, hotels, theaters and so forth — added zero new jobs in August. They had created an average of 364,000 new jobs a month since May….
A possibly even bigger factor in the U.S. employment report is a lack of people willing to go back to work….
It’s not just labor shortages, either.
Companies are struggling to obtain the parts and materials they need to produce enough goods and services to satisfy the surge in demand….
Fading government stimulus could also weigh more heavily on the economy in the second half of the year….MarketWatch
As Chris Williamson, Chief Business Economist at IHS Markit, noted after the latest IHS survey of US business activity:
Growth slowed sharply in the US service sector in August, joining the manufacturing sector in reporting a marked cooling in demand and encountering growing problems finding staff and supplies. Jobs growth almost stalled among the surveyed companies in August and supplier lead times are lengthening at a near record rate.
While the resulting overall pace of economic growth signalled is the weakest seen so far this year, backlogs of uncompleted work are rising at a rate unprecedented in at least 12 years, underscoring how supply and labor shortages are putting the brakes on the recovery. The inevitable upshot is higher prices, with firms’ input costs and selling prices rising at increased rates again in August, continuing the steepest period of price growth yet recorded by the survey by a wide margin.Market Economics
Here is what the IHS survey showed for rapidly stalling business activity:
Stalling growth, accompanied by “the steepest period of price growth yet recorded by the survey by a wide margin.“
That translates “STAGFLATION” in stark terms.
The gaping jaws of stagflation, capable of consuming any economy, now look like this:
Rapidly soaring surprises to the high side on prices accompanied by a steeply deepening downside to surprises for the economy.
Can stocks survive this monster?
In light of stagflation reality …
The big question overhanging the market is about how much longer can the Federal Reserve continue to support the stock market?
The answer seems to be, “Not much longer….”
The connection of the Federal Reserve and the stock market goes back to the time that Ben Bernanke was the Chair of the Fed. Mr. Bernanke, during the Great Recession, set off to generate an economic recovery based upon creating a wealth effect that would spur on consumer spending….
The Fed continued to pursue a rising stock market to fuel the economy and the economy responded, through the change in Fed chairs, up until the Covid-19 pandemic hit the U.S. Both Janet Yellen and Jerome Powell, who followed Mr. Bernanke as Federal Reserve chairs, continued the policy….
The big cloud hanging over this picture is the one pertaining to the need for Mr. Powell and the Federal Reserve to “back off” from purchasing $120.0 billion in securities every month and begin to “taper” the purchases….
What will investors do when they actually see the Fed easing off and the liquidity in the banking system begins to decline?
There is more than $4.0 trillion in reserve balances now sitting in commercial banks in the U.S. This is the foundation for all the market liquidity and confidence that now exists within the financial markets in the country.
The question that is being asked is “what happens when reserve balances begin to decline?”Seeking Alpha
The last time what happened was what I called “The Repocalypse: The Little Crisis That Roared.”
Let me answer John Mason’s question in the article I just quoted with a little history lesson, which I covered in much more detail in my last Patron Post.
As you can see in the following graph, when the Fed first tapered from late 2014 – 2016, the stock market went absolutely nowhere for two years. You could have sold out of stocks in 2014 and bought back in the middle of 2016 at exactly the same level. You missed nothing in terms of stock values, except the roller coaster ride of late 2015 through early 2016. (Of course, if you’re good at riding roller coasters, buying low and selling high and then repeating that, you could have done well selling at the top of each plunge and buying back in at the bottom.)
Then, in 2018-2019, when the Fed tried actually tightening by raising interest rates and reducing the size of its balance sheet (effectively money supply), stocks, again, went nowhere for almost two years. You could have sold all your stocks at the January peak in 2018 and bought back in at the same level late in the summer of 2019.
All along the way of the “longest bull market in history” and even into the present bull market (the final oval), the periods of phenomenal stock gains were fueled when the Fed was easing, with the greatest gains happening during the present bull because of the most extreme QE ever and joint federal-government money-doling during the COVIDcrisis period.
So, based on some pretty clear history, what will happen to stocks when stagflation forces the Fed to either taper, as it did in the first period of stock troubles on the chart, or actually tighten, as it did in the second period of more extreme stock troubles? You do the math. It’s not hard.
All the increases of the Great Bull Market can be accounted for by the long stretches where the Fed was actually easing and by the Trump Rally of 2017, which happened because of the promised Trump Tax Cuts (and their eventual fulfillment). Those huge cash flows into stocks fueled massive stock buybacks and huge increases to corporate bottom lines (earnings) to somewhat justify those rising stock valuations. The tax cuts provided as much available cash to stock buyers (especially those running corporate boards) as anything the Fed had done. Even the rise at the end of 2019 happened because the Fed returned to QE because of the Repo Crisis, though it denied it was doing so. At first, the Fed tried to resolve the crisis, which had been caused by its tightening, by adding hundreds of billions of dollars to the money supply through Repo loans then through outright QE during the last couple of months of 2019.
Quoting my last Patron Post,
My big prediction for 2019 was that Fed tightening would end in a massive repo crisis in the latter half of 2019 because bank reserves were being drawn down too far due to the Fed’s reluctance to give up tightening soon enough. That would only end, I said, by the Fed going back to QE to actually reverse its tightening….
The Fed had to rush back into QE during the final quarter of 2019, though, of course, Powell maintained that it wasn’t really QE because, again it was just temporary and did not involve long-term bonds. (Any excuse will do to avoid saying they have permanently monetized the US debt and its economy.)“Fed-up and Failing: How FedMed Killed the Patient“
As Mason goes on to say in his Seeking Alpha article,
There are plenty of reasons for the Fed to reduce purchases. Even stop them.
The most important one to me is the fact that all the liquidity in the banking system is forcing short-term interest rates toward negative territory….
Mr. Powell and the Fed say that they do not want the federal funds rate to become negative. But, it looks like the Fed needs to stop purchasing all those securities if the federal funds rate is to stay in positive territory.
And then there is the looming threat of higher rates of inflation.
The Fed is going to have to make a move this fall….
Investors have been betting on the Federal Reserve support going back to 2009. The Fed has not let them down. Yet….
Mr. Powell kept the Fed excessively loose during his first months as Fed chair. Rather err on the side of monetary ease than be a part of a market collapse. Then the pandemic came along and Mr. Powell oversaw a massive injection of reserves into the banking system.
Now, it seems as if we have reached the point where all the “ease” in the past is catching up with us and we are reaching a spot when the Fed will have to catch up for all the trillions of dollars it has pumped into the economy.
And, what, then, are investors supposed to do?
Investors have, for the past twelve years or so, “followed the Fed.” And, this has made them billions and billions of dollars of profits.
But, all good things must come to an end….
The Fed is going to have to change its policy stance. Investors beware.Seeking Alpha
And that way of seeing things is why I bet my blog on the present inflation train continuing until it forces the Fed to tighten and, thereby, kill the stock market (based on historic precedent that is pretty clear about how the market responds). The market has risen higher on greater easing than ever before, so it has further to fall. The alternative, I said, is that the Fed refuses to tighten because it fears the market carnage its tightening will create (or because the government demands Fed funding), and so we move into even worse inflation than the present inflation, which will rip the economy apart even more than the present stagflation already appears to be doing. That kind of carnage, too, is not likely to end well for stocks. Tends to be the kind of thing that flips sentiment on its head.
How high is too high?
The proverbial Buffet Indicator, which the Oracle of Omaha goes by for assessing whether stocks are overvalued, is further into the nosebleed section of stock valuations than it has ever been … by far:
And, if GDP continues to fall as is being widely predicted now, this gauge of stock values will look even worse.
Price-Earnings ratios also look extreme:
As Lance Roberts notes,
Corporate earnings and profits ultimately get derived from economic activity (personal consumption and business investment). Therefore, it is unlikely the currently lofty expectations will get met…. Through the end of this year, companies will guide down earnings estimates for a variety of reasons: Economic growth won’t be as robust as anticipated. Potentially higher corporate tax rates could reduce earnings…. Higher interest rates increasing borrowing costs which impact earnings….Seeking Alpha
In other words, the Price/Earnings ratio for stocks will become even further overvalued because earnings will decline.
The problem for investors currently is that analysts’ assumptions are always high, and markets are trading at more extreme valuations, which leaves little room for disappointment.
However, the price/sales ratio looks more stretched than at any time in the past:
Historic CAPE valuation also shows stocks are more overvalued than anytime other than just before the great crash of 1929 and the dot-com bust of the early 2000’s:
However, the timing for the rise and fall of stocks is based on turns in the tide of investor sentiment. Although, the level to which they fall is likely to be a much deeper plunge when they are this highly overvalued historically.
Unfortunately, the early aught years offered far better economic growth prospects due to the burgeoning internet economy than the present COVID economy offers after decimating industries all over the globe, a ravaging that continues to broaden like ripples across the oceans of this world. If stocks were overvalued during the dot-com era with plenty of room to fall, how much more so now with the entire global economy in tatters?
As Michael Lebowitz noted on Lance Roberts’ Real Investment Advice site,
If the market falls to the average of the last ten years (0 sigmas), we should prepare for losses of over 30%. If it falls below zero, as is typical, more significant losses are likely in store.Real Investment Advice
As Lance Roberts of Real Investment Advice writes,
Significantly, investors never realize they are in a “melt-up” until after it is over…. However, there are clear signs the advance is beginning to narrow markedly, which has historically served as a warning to investors….
“Relative to their 200-day moving averages (DMA), all three indexes have been generally trending lower since April, as shown in the second chart below.” – Charles SchwabSeeking Alpha
That could be a sign the tide is turning.
The Fed is now getting pushed into needing to tighten monetary policy to quell inflationary pressures. However, a rising risk suggests they may be “trapped” in continuing their bond purchases and risking both an inflationary surge and creating market instability.
We know what the market historically does when the Fed either tapers or tightens. We don’t know if the Fed will taper or tighten since it, too, knows from experience it will crash the market if it does that, and it has the government debt pressing it toward endless money printing. Still, we do know the pressure to tighten has continued to build all year long, just as I’ve said it would, and we know it shows no signs of letting up, and we know current stagflation certainly isn’t helping the economy any. So, something is going to crack, even if the Fed doesn’t.
In the face of great inflationary pressure, the Fed has its back to the wall:
The scale and scope of government spending expansion in the last year are unprecedented. Because Uncle Sam doesn’t have the money, lots of it went on the government’s credit card. The deficit and debt skyrocketed. But this is only the beginning. The Biden administration recently proposed a $6 trillion budget for fiscal 2022, two-thirds of which would be borrowed.” – Reason
Exploding government debt will not let the Fed tighten. What is it going to do?
The problem, of course, is that the Fed must continue monetizing 30% of debt issuance to keep interest rates from surging and wrecking the economy.
That was also John Mason’s concern. Without continued Fed largesse, interest rates will certainly rise, as the government has to replace the Fed as chief financier. Fed bond buying is the only thing holding rates down, in spite of inflation, and rising interest will crash the bond market, as Bond King Bill Gross argues:
Bill Gross, the “bond king” believes that bond prices are at their peak with no place else to go but down…. Gross … is attracting more attention these days referring to bonds as “trash” and arguing that if one buys U.S. government debt, one is almost assured of losing money….
To Mr. Gross, the Federal Reserve must start reducing the amount of securities it is adding to its portfolio every month.
This past year the monetary authorities bought 60 percent of the “net issuance” of the federal government debt. If the Fed “backs off” from its current level of purchases, the question becomes, how much will the private markets be able to absorb in 2022 and beyond.Seeking Alpha
This has skewed the entire bond market to where now even high-risk, high-yield corporate bonds are mostly pricing with negative yields. (Negative yields equal premium prices, making it likely prices have a long way to fall if they even try to match up to current actual inflation, much less wherever inflation is going to wind up.) Whereas never has more than about 8% of the HY market priced with negative real (inflation-adjusted) yields, about 85% now has negative real yields:
So, Fed policy will cause either a stock crash, a bond crash, or both. Gross says the 10-year must rise from its current yield around 1.35% to 2% or more just to track with inflation and to make up for the lack of demand for government bonds if the Fed backs away from being the main buyer in order to fight inflation — the buyer of last resort for government bonds. That, John Mason points out, would lead to substantial losses for current bond investors holding 10-year government bonds at the lower yield.
Bank of America, gives the following yield guidance for the remainder of the year:
Of course, if the Fed doesn’t tighten and keeps forcing bond yields to remain down by soaking up all government bond issuances at that 60% rate of consumption, stagflation will become a roaring inferno, the likes of which we haven’t seen in the US. I find it highly improbable that investor sentiment will survive that kind of upward surprise in prices and the downward surprises in the economy that those soaring prices will bring about.
Danged if you do and danged if you don’t
That’s to put it politely, of course. Sounds to me like, either way, the economy is going to collapse and markets with it. Either the stock market gives way because the Fed tapers its bond purchases or even tightens, which raises interest rates, in order to curb inflation, and the bond market fails simultaneously because yields rise as the market fills the gap in government funding as the Fed tightens, or soaring prices ravage corporate profits and consumer ability, destroying the economy, and stock investors will like that garden of horrors no better.
What I am seeing is the everything bubble bursting as anything the Fed tries to do to save one thing now now only makes something else worse.
Since the days when the Fed first started its “Great Recovery” program, as I call it, the economy, and often the stock market, has fallen every time the Fed has tried backing away from its quantitative-easing strategy. In one of my first articles written on this blog back in 2011, I wrote
I predicted that the government [its puppet or agent, depending on how you look at it, being the Fed] would try a second round of quantitative easing as soon as the first one they approved ended and downward reality began to reappear of a hard road in front of us. I have even stated the government would be strongly tempted to try a third round when the second ended and the ugly reality, again, began to reappear. Anything to avoid this austere reality. Stark realities mean angry voters….
That is the bleak landscape we now face (and are still trying to deny). The artificial recovery made it appear for awhile as if we were just going through another bursting economic bubble and were on our way out. In real fact, ALL of those efforts did nothing to correct the underlying problems of the economy. That is why this is the same recession, not a second recession. It is due to continuation of the same cause. It looks like two recessions or a double-dip only because it was falsely propped up in the middle by the unsustainable effort to create funny money. The worst part of Ben Bernanke’s solution is that he actually perpetuated the problem and even made it worse…. Ben Bernanke sought to prop up the failed housing market by expanding debt once again. Yet it was this highly indebted housing economy that led us into this mess.“Saving Capitalists from Capitalism“
We’ve been kicking this can down the road of reviving the economy every time it fails by exponentially increasing government debt and Fed money printing. In my last Patron Post, I laid out in great detail how the economy has failed every time the Fed has backed away from QE. We’ve now reached the point where inflation is forcing the money printing to end just as the economy is going down again and when stocks are more dependent on Fed support for their extraordinary valuations than ever before.
We all remember how Fed tightening went when it actually tried it back in 2018. It was a disaster, which forced the Fed had to call it off well ahead of the Fed’s stated plans. Now mere tapering could be as big a disaster as tightening was because it happens in a vastly worse economy of rapidly plunging GDP if it happens at all.
As I concluded in that last Patron Post,
The new QE, QE4ever, has already managed to outdo all the previous rounds of QE put together. So, as I said back at the start of tired and endless recovery plan, once we began down the path of QE as a way out of recession, instead of rectifying the real problems that were the cause of the Great Recession, it became QE forever, Baby! We decided to solve a debt problem by piling on more debt in that all Fed money issuance happens through debt issuances.
And that’s why I call this the Great Recession Blog. We’re still on the Great Recession Recovery Plan with no end in sight because we solved nothing! We just bought time — “kicked the can down the road” –at the cost of ever spiraling debt, financed by exponentially growing Fed money printing. And we all know what happens now if the money printing actually stops. This time, however, the Fed has inflation breathing like a dragon down its back to face it to stop moneh printing, and this time the Fed faces that tightening pressure when the economy is already slumping:
“Fed officials themselves expect noticeably slower growth in the years ahead at a time when both monetary and fiscal policy will be tighter. That raises more questions about whether Powell and his cohorts can get the exit right. “Are they exiting at the right place? Are they exiting at the right time, at the right magnitude? Given the slowing of the economy, we have questions around both,” Misra said…. ‘I think people are very worried about the idea that maybe this isn’t going to work out the way we planned….”
It never has. Why would it start to now?“Fed-up and Failing: How FedMed Killed the Patient“