We are at the brink of the fastest demand collapse in history. It's already beginning in Asia and Europe and will soon spread to the rest of the world. The Fed just reduced liquidity in an already illiquid market. Which gets us to the phase of global dislocation that I call "the Gong show"...
No, they don't see it coming. Read any pundit today and all they talk about is "stagflation". However, stagflation was a very rare occurrence that happened only in the late 1970s when the middle class was at its peak. It meant slow growth and inflation, but not recession. The critical assumption is that this Fed will allow inflation to persist when they've already taken steps to ensure that it does not. This Fed is actively pushing the economy into recession in order to squash wage inflation. That's all this is about. Everything else is just background noise. Why? Because the Fed ASSUMES they can manage a soft landing into recession. And that is the lethal assumption. They are pushing the economy towards a liquidity trap. Both in terms of market liquidity which has already collapsed and in terms of economic liquidity:
"A liquidity trap is a contradictory economic situation in which interest rates are very low and savings rates are high, rendering monetary policy ineffective"
From an economic standpoint, monetary policy is now officially ineffective. Yes the Fed can expand their balance sheet, but they won't be able to offset economic demand collapse. This is officially a larger policy error than what took place in September 2008, because back then the Fed had several percentage points of Fed rate to lower.
Bear in mind that the bond market has been warning of THIS risk all along. There was not one moment even during maximum fiscal and monetary stimulus where the bond market believed that inflation was a long-term threat. Pundits claim that at this same level of CPI the Fed rate should be at 13% as it was in 1980. Imagine if even the 10 year yield was at 8% which is 4x the current level. If that happened global asset markets would be a smoking crater right now. Comparing this period to 1980 is asinine, yet almost everyone is doing it right now.
As it is the bond market is already warning of recession after ONE rate hike:
This is the Five/Ten yield curve - most inverted since the 2007 recession began. But, the bond market is once again being ignored, by the Fed and all pundits.
The damage is done. The Fed is now ahead of the 2 year by the most since October 2008. What pundits and investors constantly ignore is the happy feedback loop between commodity speculation and inflation expectations. When both are rising they get locked in a death spiral higher. But when they are falling, they are in a death spiral lower.
Under these asset collapse conditions, "stagflation" is nothing more than a speed bump on a vertical path lower:
But it's not just the bond market that's being ignored right now.
China and Hong Kong are imploding in real-time. Not just their stock markets, their economies are imploding under the weight of the zero COVID policy.
The divergence in policy between the Fed and PBOC is now the widest since August 2015:
The elephant in the room is the impending default on Russian debt. The first default since 1998 and the first foreign denominated default in 100 years. As of this writing Russia hasn't made the payment due today. The last time Russia defaulted in 1998, the Fed cut rates .5%. Nasdaq lows reached this current level AFTER the default, whereas this is BEFORE:
Next, we learned yesterday that German economic sentiment just collapsed at the fastest pace on record. Faster than during the pandemic. You will note that European stocks are three wave corrective, having rallied for the past week. Given that record outflows from European stocks combined with record collapse in investor sentiment, then we can assume Europe is the next market to go fully bidless now that short-covering is ending:
Not to be left out, the Fed is also ignoring U.S. Tech collapse which this week was on par with December 2018 which is when Powell capitulated and reversed policy. As anyone can ascertain, not only has Powell not capitulated, but speculators haven't capitulated either.
What today's investors don't realize is that the Fed isn't worried about stocks imploding, they are worried about wage inflation. Therefore, they will continue tightening UNTIL they are convinced that wages are no longer a problem.
And that is going to take a while.
In summary, at the beginning this fraudulent market was running on maximum monetary stimulus - the virtual simulation of prosperity. Then it transitioned to running on maximum greed and Wall Street criminality. Having exhausted both of those sources of funds, it's now running solely on rampant self-destructing buffoonery at the end of the weakest recovery in U.S. history.
