"Inflation is out of control"
The Japanese have learned the hard way that EVERY central bank pump and dump ends badly for those who buy them with both hands.
Measuring percentages using a zero denominator and calling that "inflation" is at best dumbfuck math. At worst it's deceptively motivated to ensure that wages never re-capture their lost decades to corporate profit. What so many pundits are ignoring about "inflation" is that profits have grown 25% since pre-pandemic, whereas wages are up 8%. And yet I don't hear any pundits complaining that profits are too high. We are now a society ordered by and for the maximization of profit at the expense of everything else - the economy, the environment, and the workforce.
There are several reasons why persistent structural deflation is a problem for the economy. First off, it means that the economy is now stuck at the zero bound and any time there is an attempt to lift off from 0% interest rates, markets implode. So it is that the Fed now finds itself fully charged to tighten monetary policy while ignoring the $200 trillion global asset bubble in the room. It's a fool's errand of biblical magnitude, and hence no one questions it. Why the Fed allowed the asset bubble to grow to such a lethal magnitude will be THE question of all time. What were they thinking? It's as if they were too busy trading stocks to notice their bubble was out of control. This entire society is fully captured by asset bubbles now, having full faith and confidence in the virtual simulation of prosperity and its acolyte QE. Former hedge fund manager Hugh Hendry predicted it would end this way. A society fully addicted to Disney markets and questioning nothing to the bitter end.
However, the REAL risk arising from the zero bound is the lack of economic stimulus buffer during recession. To inflate a record credit bubble AND keep interest rates at 0% for too long, is the worst case scenario in the event of economic dislocation. It means the Fed won't have the tools they need to revive the economy.
Consider this risk in the context of the record credit bubble. The pandemic allowed many companies that were already imploding in late 2019 to cheaply rollover their debt. This time around, they won't have the Fed "emergency powers" to tap during the downturn.
Which means we now face record de-leveraging at the ZERO bound.
Next week, the FOMC will update us on their interest rate plans for 2022. Over the past weeks since their last meeting, markets have been pricing in more and more rate hikes. Over the weekend, Bill Ackman suggested they should do an immediate half a point "shock and awe" to restore their credibility.
What Ackman doesn't seem to understand is that if the Fed raised rates half a point next week, every risk market on the planet would be a smoking crater. Maybe he does understand, since he made "The greatest trade of all time" during the pandemic betting against credit markets. No conflict of interest there.
Which gets us to the casino.
First off, bulls should be worried that despite ever-rising bond yields, banks and financials are now imploding deja vu of Q3 earnings. In my last post I predicted that both Goldman and Schwab had reached peak profit and one day later both imploded. They are joined by JP Morgan, Citigroup, and Interactive Brokers.
The Momentum Factor strategy has been reconfigured to include a much larger weighting in Financials. Here we see it's very much deja vu of the last Fed "policy error" in 2018:
The IBD 50 consists of the fastest growing companies in the U.S. Companies with REAL earnings. Now these too are getting monkey hammered. Next support is the 2020 pre-pandemic high:
The NDX internals are indicative of Third wave down.
Oil realized volatility is almost as high as it was during the pandemic, and that is in a rally. Which portends badly for what happens when this rising broadening top implodes.
We see via the volume momentum oscillator, the S&P is nowhere near a "buyable" dip. Which means far more dislocation is in order.
They too are heading back down to reality.