Are You Not Entertained?
This morning, Mr. Market looked like the corpse of Sonny Corleone on Amerigo Bonasera's table. Then, all of the sudden, stuff started turning green.
So yesterday we get the 9.1% CPI print pre-market. That announcement was followed by a gap down open and dip buying most of the day despite the negative action into the close. Then today we get a bad start to earnings season with JP Morgan suspending share buybacks pre-market. What followed was another gap down and utter calamity in all markets not named “the dollar.” It seemed everything was getting murdered. I’m talking about a selloff as diverse as breakfast tacos from San Antonio.
That was my last dig at the Biden administration in this post, I swear *Narrator: he’s lying.* We had the Dow Jones down 2%. Silver was down almost 6%.
Oil went below $91. The Euro, which has been priced above $1.00 for *checks notes* about 20 years, was briefly below $1.00. The ten year yield was back above 3%. The CME probability was showing an 83% likelihood of a 100 bps hike later this month.
Mass hysteria! It was a bloody street, guys. But then something happened. Like an angel from the heavens came Fed governor Chris Waller with this banger:
With the CPI data in hand, I support another 75-basis point increase
What? Not 100? Of course, this is dependent on more data. This morning we got a fresh look at initial claims - that came in at 244k vs an expected 234k. Tomorrow we get retail sales. And if consumer sentiment is any indication, that might miss the 0.9% consensus expectation. Then next week we get home sales. With mortgage rates still above 5% and median home sales prices looking toppy. Surely, everything is fine… Only it isn’t. We are headed for a recession and the CPI is still enormous. Stagflation.
The central bank is trapped.
Repeat the line. *Narrator: See. Told you he was lying.*
The Federal Reserve desperately wants to maintain any sliver of credibility that the market will still grant it. But why should the market give it any at all? Why are we to believe that it’s definitely different this time and the Fed will raise interest rates drastically higher? Have they not had the chance to do that for several months?
Whether it be Putin, supply chains, or the ballooned money supply: let’s put aside each theorized cause of the inflation consumers are now experiencing because I’m not sure it really matters. The fact remains, the Fed Funds target rate is currently between 150-175 bps. Everything else is just talk. If the central bank has done anything masterfully this year, it’s convince people that it has actually done anything to curb inflation. Even Peter Schiff, who is no friend of the central bank, is using words like “aggressively” when describing interest rate hikes.
Really? Aggressively raises rates? When?
Despite my best efforts, no response from Peter this time. Congrats, my notifications, you live to see tomorrow unscathed.
What the hell is going on here?
We’re at the point now where the market will buy the dip if the Fed hike in July is 25 bps lower than what was expected 2 hours prior. This is not healthy. Markets shouldn’t move like this. Everything about this is absolutely perverse. Stocks shouldn’t rally at the thought of a slowdown simply because it might mean the Fed will bail everybody out. But this is where we are. This is what we’ve been taught to expect. And sure as you’re born, this is essentially what I’ve been arguing since I started this publication. The Fed won’t meaningfully raise because it can’t. It can jawbone and print money. That’s it.
Is it possible the market is finally accepting that the Fed is and has been bluffing this entire time? Does the market finally realize that the Fed has been hiking 25-50 bps at a time and crossing its fingers with the hope that the raises will be slow enough to not cause too much damage while base effects do their thing? Does the market finally realize that trillions in sovereign debt can’t be refinanced at a higher rate in a fiat Ponzi system? Is it possible the market is accepting that the lender of last resort is really the lender of only resort? Is it possible foreign economic powers might not be in the market for US debt any longer? Is it possible even a 2.5% funds rate, which we still don’t actually have, is like trying to put out a fire with a water pistol when inflation is over 9%?
I’m reminded of Occam’s razor in this moment. Which is a philosophical principle for problem solving that essentially reads like this; the simplest explanation is probably the correct one. All of the people on Twitter with degrees and a half a million followers keep saying the same thing. The rest of us, the plebeians, don’t understand that the Fed really means business this time. It’s going to surprise us to learn how high the Fed is willing to go. Okay. Then why haven’t they yet? What could they possibly be waiting for at this point? They’re quite obviously behind the curve. They have the political cover to raise. Yet they haven’t, but the say they will.
Last night, we got a big thread from Bill Ackman explaining why the Fed totally means it this time and why rates will not only get above 3% but may even stay above 4% for a sustained period of time and that policy response would be more similar to the stagflation in the 70’s and 80’s. And something about Jerome Powell not wanting to go down like Arthur Burns. Thus, no Fed pivot.
Let’s put aside the fact that old “Hell is Coming” Ackman was spreading panic a literal week before the bottom in the S&P while he was actively covering his short position that netted 10 figures, his analysis leaves out a very important detail that illustrates why the 70’s and 80’s do have a key difference from now… you know what I’m going to say right? THE DEBT.
Public debt as a percentage of gross domestic product was generally between 30-34% for the entire 1970’s. It is four times that level now. Again, it comes back to the market for US debt. Who is buying treasuries that have a negative 6% real yield? I would argue you’re only doing that if you expect the Fed to pivot and start backstopping the bond market again. And if that happens, there are probably assets with actual upside that should be looked at instead. Speaking of which, somehow Bitcoin was actually up today. Weird.
Disclosure: I’m not an investment advisor. I merely share what I do and why I do it. You shouldn’t take anything I say as investment advice and always do your own research when making investment decisions. Cryptocurrencies, tokens, STONKs, and digital trinkets could all go to zero.
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Great read! 100% agree!