The Nasdaq was up 2% today before the Fed, then went up another 2% after the Fed announced its rate hike decision, finishing up 4.06% for the day. The S&P was up 2.6% and the Dow was up 1.4%.
You know my position: this is bear market behavior. Extreme swings in either direction is characteristic of a bear market. Most of the best market rallies on record come during catastrophic bear markets.
Bear markets are chaotic and volatile by nature, and means wild swings from extreme optimism to extreme pessimism.
The prevailing trend of the market right now is down, and until proven otherwise, we are in the midst of yet another face-melting bear market rally. Remember this happened in March as well; the market ripped higher, everyone thought the selloff was over and Happy Days were Here Again, but almost immediately afterward, they got rug pulled.
So why was the market up so much today? It was not because of the rate hike–that was already priced in–but because of what Powell said after announcing the rate hike. The market now believes the Bad Days Are Over and it’s clear skies ahead–the market will go back to its default setting, green. Because markets are never supposed to fall, don’t you know that? When the market falls, that means something is wrong, and it needs to be fixed somehow. Markets should never go down at all, ever.
You know my position here: the Fed and the government in general are lying to us all about the true state of the economy and the Fed’s intentions here. They are trying to execute a controlled demolition of the economy; this is managed decline. They want this to be an orderly market crash/housing crash.
They don’t want markets to be in chaos.
They are whispering soothing words into investors’ ears as they lead them to the slaughter. “Oh, don’t worry about that 75 basis point rate hike, it’s all good, we’ve got it under control. No need to panic.”
I’ve got to tell you, the Fed has done a masterful job, all things considered, at lulling the markets into complacency. Sure, we’ve had a 20% selloff in the S&P and a 30% selloff in the Nasdaq (well, probably 25% now). But it hasn’t really been all that chaotic.
And yet we’re in the midst of the most aggressive rate hiking cycle on record. For one thing, the Fed hadn’t hiked rates by 75 basis points since 1994. They’ve now done it twice in the span of a few months.
And back in 1994, interest rates were already at 4.75%.
In 2022, they’re hiking rates from basically zero. It may be the same size move in terms of basis points, but in terms of percentage change in interest rates (i.e. the log scale of a chart) it’s the steepest move ever.
And people really haven’t panicked.
Maybe that’s a good thing. Maybe the Fed will continue smooth-talking the market until we all look up and see the S&P is down 55%, the Nasdaq is down 70% and the housing market is back to 2018 levels. Who knows?
But my position is that the Fed just doesn’t want people to panic. They want an orderly controlled demolition of this asset bubble. They will not relent until they’ve brought inflation under control.
Alf on Twitter has a great explanation of why the market was so jubilant in the face of vicious rate hikes:
Despite openly recognizing economic growth is softening, the Fed unanimously (!) decided to hike by 75 bps – it’s all about inflation, inflation and inflation. But markets convincingly started rallying only when Powell went ahead and said the following…
…”we are now at levels broadly in line with our estimates of neutral interest rates, and after front-loading our hiking cycle until now we will be much more data dependent going forward”. Let’s find out why this was so relevant.
So basically, Powell said the Fed has been hiking on schedule for the past 7 months–nothing would change their mind at all. They were determined to get to 2.5% as fast as possible and they did. But now they will change their approach.
The neutral rate is the prevailing rate at which the economy runs at its potential – without overheating or excessively cooling down. With this 75 bps hike, the Fed just reached its estimate of neutral rate – from here, they aren’t contributing to economic overheating anymore
So they expect inflation to come down now that they’re a neutral rate–maybe not all the way because supply chain problems still persist, but at least the Fed’s easy monetary policy will no longer be exacerbating that supply-driven inflation. This is what the Fed thinks.
People may disagree as to whether or not 2.5% interest rates are truly “neutral” but this is just how the Fed sees things.
But that also means any hikes from here are going to put the Fed in an actively restrictive territory. The bond market knows that every time the Fed becomes restrictive, they break something. So Powell was asked a couple of very important questions.
What about bond market pricing? (70+ bps cuts in 2023) What about financial conditions? (Bonds & equities rallying, easier financial conditions) So: what about forward guidance? ”From here onwards, we are fully data dependent”. Boom: he ditched it completely.
Meaning the forward guidance, is what he ditched.
Why is it relevant? It all starts from the very strong opinion the bond market has developed about inflation over the last few months: it’s gonna move down, and very fast. Between July ’23 and ’24, CPI is priced to print at around 2.9% = PCE ~ 2.5%. Basically at target!
Meaning the bond market thinks inflation will come down within 2 years to about 2.5%, which is where interest rates are now. And since you want interest rates to be higher than the rate of inflation, it is believed that interest rates are in a good spot.
So if Powell is not on autopilot anymore, and markets have a strong opinion on inflation and growth collapsing they can also price all other assets around this base case scenario. If you look under the hood, market action also validates this narrative.
Who’s outperforming here? Nasdaq & Crypto. If the Fed isn’t gonna force tighter financial conditions on autopilot anymore, real yields will actually start declining again.
When real yields decline, valuation-intensive and risk-sentiment driven asset classes outperform. That’s because the marginal return for owning cash USDs becomes less attractive and the incentive to chase risk assets is larger: QQQ & BTC.
Like we talked about a while back: lower interest rates push investors into the stock market, and specifically high growth/high beta stocks. Which are coincidentally the ones that have been sold off the hardest lately, and are rebounding currently (or dead cat-bouncing if you prefer).
I can rationalize the narrative being built post FOMC, but no forward guidance = a very, very volatile Fed ahead of us. One small hawkish turn and it’s all gone. You must price in some additional risk premium here, not less!
Finally, what’s the bond market saying? We priced away some hikes between now and December, and this is how we are left: 50bps in Sept, 25bps in Nov, 25bps in Dec, then DONE. Then 50bps of cuts in 2023. A higher likelihood that ”peak Fed hawkishness” is behind us.
The market believes it’s all clear blue skies ahead from now on. Inflation is slayed and done for because the Fed hiked rates to 2.5%. The market, because its participants are trained to interpret everything the Fed says and does as in pursuit of a booming stock market, believes the Fed their backs and is done hiking.
But these market participants fail to realize: the rules of the game have changed now. The rigged game they have been playing and winning at from March 2009 to January 2022 is done. Now, due to inflation, there is a new game, one that is rigged against them instead of in their favor.
The Fed is no longer their friend. The Fed is no longer going to be there to bail them out anytime the S&P 500 takes a tumble. The days of the plunge protection team are gone.
Market participants are like cows being fattened up for the slaughter. The Fed is telling them everything is fine purely to prevent them from panicking. But in reality, the Fed’s only concern right now is inflation, because inflation is destroying the Fed’s dollar (just look on the back of any dollar bill and you’ll see FEDERAL RESERVE NOTE), and so inflation must be stopped at all costs–even if it wrecks YOUR silly stock portfolio, and tanks YOUR house’s value.
News flash: the Fed doesn’t care about your net worth. They will cut your net worth in half if they have to without blinking an eye.
A recession, we can come back from. Even a depression, we can come back from eventually.
But what we can’t come back from–and by ‘we’ I mean the ruling class–is from a hyperinflationary collapse of the US dollar.
A deep recession may cost a bunch of politicians their jobs as they’ll be voted out, but that’s fine–the new crop of politicians can just be bought out, same as the old ones.
But a hyperinflationary collapse, that’s the end of the empire. Not only will there be no dollars left to buy out the new politicians, there may not even be any politicians, period, because the government has collapsed. That means everyone in power is done for. The rich people are even screwed if the dollar collapses (although they probably have enough real assets to at least weather the storm comfortably).
And when the people start going hungry, and start rioting and overrunning presidential palaces and houses of government, like you’re seeing in Sri Lanka–that’s what the Fed is trying to avoid.
If not brought in check, inflation will cause the destruction of the dollar.
When currencies collapse, empires collapse. It’s that simple. When faced with a choice between subjecting us peasants to a deep and painful recession, or the total destruction of the US dollar, the Fed’s choice is easy.
And plus, a hyperinflationary collapse is painful for all of us. Not just the elites–not by a long shot. They just lose the most because they have the farthest to fall.
People starve when currencies collapses.
And then that’s how governments get overthrown. That’s when the guillotines come out–you know Marie Antoinette, who famously said “Let them eat cake”? Yeah, she was talking about the starving peasants in 1780s France, who didn’t have any bread. Eventually the peasants and everyone else revolted and Marie Antoinette was sent to the guillotine.
But I digress.
The point here is that people now think the Fed is their friend again and it’s back to accommodative monetary policy.
But might I remind them, the Fed is currently contracting its balance sheet as well. That hasn’t changed. Sure, they’re doing it at a snail’s pace, but they’re doing it. And for most of the bull run that went from 2009-2022, the Fed had to be EXPANDING its balance sheet in order for the market to go up. Not just keeping it steady, but actively expanding it. Now it’s going into contraction mode. That is not good for the markets.
And plus, the Fed didn’t even say it was done hiking. It just said it’s done hiking on autopilot. They just said they’re data-dependent.
Maybe the market skyrocketed today because when #Investors heard “data-dependent,” they knew the data can and will be cooked in order to justify continued permabullishness and easy money. Who knows?
But what I do know is that the Fed has to get interest rates above the rate of inflation in order for inflation to come down, all else being equal.
This is not just a supply-chain driven inflation; it’s been caused in part by the fact that so much new, printed money has flooded into the system and diluted the value of all the existing dollars.
Plus, even with the supply chains, we are not in control of a lot of that. What if the Russians, who control so much of the natural resources our supply chains depend on, decline to lower their prices or raise their output for us? What if China and Saudi Arabia and the rest of the BRICS alliance joins them and says, “Pay up, America”? They basically already have.
These supply chain issues are not going to just resolve themselves overnight. A lot of it is caused by geopolitical tensions that have been simmering for many, many decades and are now just coming to a breaking point. We have pissed off the countries who represent the very beginning of so many of these vitally important supply chains–in other words, the countries that produce natural resources and raw materials. And they are not going to cut us any slack. They are sick of the US government being the biggest scumbag, rainbow flag-waving, drone-striking, sanctioning dickheads on the planet.
They’ve been waiting to stick it to us for a long time. They are so close to a multipolar world– one not dominated by the asshole Americans for the first time in 80 years–they can taste it. I don’t think they’re going to relent or cut us any slack.
The Fed can’t control the supply chains. It can only influence demand.
And right now, its solution to inflation is to destroy demand. I don’t think it has wavered from that goal, no matter what the market says. I don’t believe the Fed just thinks inflation will come down on its own without a devastating recession first.
I think the Fed is just saying all this so people don’t panic.
Now if your takeaway from this is that the Fed is frantically hiking rates because they’re afraid of getting their heads chopped off, obviously that’s a very extreme scenario. I don’t think we’re on the verge of a French Revolution scenario. At least not yet.
But Sri Lanka? I don’t know. I can’t really rule it out. It could happen here.
It just feels like we are at a point in this country where more and more people feel like they have no skin in the game–like they have no personal interest in maintaining the status quo. It’s like a growing percent of the population would rather upend the status quo, blow it all up.
People are just so damn cynical about everything in this country now. They’ve lost faith in the whole system.
How can you blame them when the rich are the only ones getting richer and the ruling class is now at the point where they transparently give zero fucks about all us peasants and peons?
That is a very dangerous thing for aristocrats and oligarchs. They seem to have forgotten just how tenuous their grip on power truly is.