Up until now the bullish pundits have been causing all of the problems, with their perpetual Disney World bullshit. However, now it's the latecomer bears with their half-assed predictions who are causing the most confusion...
So allow me to elucidate what's coming:
It's called THE WORST CASE SCENARIO. Featuring a Fed tightening into global meltdown.
Any questions?
Let's see, worst Nasdaq selloff since 2008. Biggest commodity spike since 2008. Worst consumer sentiment since 2008. The most global rate hikes since 2008. The biggest housing bubble since 2008. The most institutional selling since 2008. And the largest recession stock outperformance since 2008.
Therefore, it MUST be a soft landing, with an 11% probability historically:
Below we see U.Michigan one year consumer inflation expectations. Currently at ~5%. Which is the SAME level the public expected DURING the last three largest recessions since 1980. In other words, these people don't even know when they are in a recession. ACTUAL inflation in each case was at or below 2% (bottom pane). In 2009, FAR below i.e. -2%.
Back in 2008, inflation expectations peaked in July and August. The market collapsed in September. In hindsight, the economy had been in recession for EIGHT MONTHS already:
Then as now, the Fed was SOLELY concerned about public hysteria over inflation:
"On the morning after Lehman Brothers filed for bankruptcy in September 2008, most Federal Reserve officials still believed that the American economy would keep growing despite the metastasizing financial crisis"
"The transcript for that meeting contains 129 mentions of “inflation” and five of “recession.”
Well, this time around they are making a far greater error. They are actively raising interest rates during an incipient global meltdown.
Back in August 2015, the Yellen Fed was planning a .25% rate hike in September which caused the Chinese Yuan to implode. That in turn caused a chain reaction crash of global risk assets. Which I called smash crash. It was a limit down gong show that forced the Fed to delay their rate hike.
This time around, the Fed funds futures have priced in 1.75% of rate hikes between now and July, which is 7x more than what imploded China in 2015.
And now already, the Yuan is imploding AGAIN:
This time around, China is FAR weaker than 2015. Their zero COVID policy is a TOTAL disaster. Wall Street has been continually downgrading China GDP for 2022, now currently at ~4.5%.
Here we see the largest divergence between China GDP and commodities since the 2014 Crimean invasion. Which was followed by the largest drop in oil prices since 2008. From over $100 in 2014 down to $26/bbl in early 2016.
Now, all of a sudden new bears are showing up trying to pick a bottom somewhere below this meltdown in progress. There's only one problem, which is that the Fed is nowhere near capitulating on rate hikes. In fact they are planning to "front load" rate hikes over the next three months. A term that has been used multiple times recently by Fed members.
Unfortunately, the ONLY thing that has turned markets around since 2008 IS the Fed. Case in point 2009, 2011, 2015, 2016, 2018, and 2020. EVERY TIME it was the Fed pivoting from hawkish to dovish. Pausing rate hikes. Cutting rates. Or re-starting QE.
So I created this chart, showing where the Fed might start getting worried about asset declines. This is strictly hypothetical. I will update it as we get signs that the Fed is starting to change policy. However, given the magnitude of this debacle, risks are skewed to the downside. Once the global margin call gets started, central banks will have no chance to stop it.
All of which is why I say there are no safe assets right now. The safest is "cash" aka. t-bills and money market funds. This was the lesson from March 2020 that has already been forgotten. Even long-term Treasury bonds imploded (but they recovered first). Gold also imploded, but recovered second after Treasuries, the same sequence as in 2008.
When the Fed reinstated QE on Sunday March 15th, 2020 the S&P opened LIMIT DOWN. March 16th was the biggest down day since 2008. Day session circuit breakers were triggered.
This time will be FAR WORSE. By the time the Fed pivots, the market will be in FULL panic mode. They will view Fed reversal as confirmation of recession. Which is what it will be.
Only when the Fed itself panics and JAPANIFIES the bond market, will the stock market eventually find a tradable bottom. In 2008 it took four months. I make no predictions this time around.
Regardless, the damage will be done.
What no pundit will say then or now is that the low in 1930 was a tradable low. But it was NOT the bottom. The all time high was not exceeded until 1955. TWENTY FIVE YEARS later.
Which is not so bad when you consider the Japanese are on year 32.
In summary, the *new* retirement will be buying FEAR and selling BULLSHIT. And it starts NOW.
GAMBLE AT YOUR OWN RISK.
