The Fed has now officially entered Kamikaze mode. Markets face extreme risk between now and the next FOMC which will feature a double tightening of the short end and long end at the same time. A feat never before attempted. For good reason.
It's idiotic...
A Kamikaze is a WWII Japanese suicide pilot. They would fly planes loaded with bombs and crash them into U.S. Navy ships. Or at least try. Many of them were shot down by ship guns or patrolling U.S. aircraft before they could hit their target. Such as this one shown above.
Step back and consider why this is happening. The labor market is extremely tight and companies are freaking out that they have to pay people more money. So business leaders are demanding that the Fed tighten monetary policy as quickly as possible. At every meeting/minutes for the past several months the Fed has become MORE hawkish.
Unfortunately, tightening monetary policy in the midst of rising prices can only do one thing - collapse demand. In addition, the price signal will ultimately lead to an increase in supply. Meaning the Fed is on verge of creating human history's largest glut.
There is literally NO comparison between now and 1980. Back then prices had been rising for SEVEN years straight since the oil supply shock of 1973. Any blind man can see that nominal commodity prices are nowhere near an all time high. And relative to the wage CPI (bottom pane) they are near an all time LOW. What we are witnessing is FULL Idiocracy. But no one can stop it because the consensus at this juncture is that this level of tightening is NEEDED.
Capacity utilization has been falling for forty years straight since the onslaught of Supply Side economics. Cycle after cycle of mass layoffs and outsourcing. As deflation entered the economy via imports, interest rates fell and cheap capital fueled automation. Cheaper capital and more automation. The economy has been locked in a deflationary feedback loop. The official unemployment rate is a lie of BIBLICAL proportion. It first removes all of the long-term unemployed who have given up on finding a job. The employment population ratio is the lowest in U.S. history. If we reached a point of total layoffs and everyone gave up looking for work, according to today's Idiocracy we would reach ZERO unemployment and ZERO employment at the exact same time.
All of this deflationary impulse went into temporary reverse during the pandemic. Mostly because following 20 million pandemic layoffs in March 2020, three million discouraged Boomers left the workforce. AND because immigration was substantially reduced. Let's not forget that fact:
"Net international migration (NIM) added 247,000 to the nation's population between 2020 and 2021, according to U.S. Census Bureau July 1, 2021 population estimates released today.This is a notable drop from last decade’s high of 1,049,000 between 2015 and 2016"
So now the Fed is under extreme pressure to tighten monetary policy. The Fed minutes revealed that they very likely will increase rates at .5% (double the typical rate hike) AND reduce the balance sheet at double the speed of 2017. In other words double tightening at both ends of the yield curve at the same time. This has never been attempted before.
4x tightening.
The last .5% rate hike was in May 2000 when the Dotcom bubble was starting to implode. Within one year the Nasdaq was down -60% and eventually fell -80% at the 2002 lows.
Meanwhile, the market has ALREADY tightened ahead of the Fed. The 2 year has gained as much in 6 month as it did in six years following the Financial crisis. Now this week James Bullard of the St. Louis Fed thinks that rates should go to 3.5% over the next two years.
Currently the 2 year is at 2.5% which is near the decade high. Apparently that rate of change is not steep enough yet.
Lately Fed members have been competing for who can be the most hawkish. Up until THIS WEEK pundits have been ignoring the Fed's increasing level of hawkishness month after month. Now they are way behind the curve of warning their clients. They've been saying all along that when the yield curve inverts, the market generally rallies for another year. This week however they seemed to have awakened from their stupor and realized that this time is nothing like the past. Too late. Now the sheeple are convinced they can ride it out. They no longer fear the Fed, because they've been brainwashed to believe the Fed can always arrange a timely bailout. They forget that the Fed bailout in 2008 arrived FOUR months before stocks bottomed -40% lower.
Given all of this information, there is now extreme risk between now and the upcoming May 4th Fed meeting. There have been major global selloffs ahead of the past three FOMC meetings, specifically in the four weeks prior. This week we got a taste of renewed volatility.
The Fed has nowhere to go on rates, except .25% down in case of a recession. The last thing this economy can stand is an asset shock following inflation shock, oil shock, and pandemic shock. And yet that's EXACTLY what the Fed is creating.
A crash landing at the ZERO bound.
In summary, Shock Doctrine is the policy of capitalizing upon human misery in order to dramatically increase profit.
This time the shock will bring down the entire house of cards.
Why? Because "more" was never enough.
