GLOBALIZATION IS FINAL EXPLODING

Globalization has been steadily disintegrating since 2008. Environmental meltdown, mental health breakdown, global pandemic, trade wars, World War III, economic collapse. What can you say, no fool saw it coming. A staggering two thirds of the deadliest mass shootings in U.S. history occurred since 2007. The fact that Biden and Trump are deemed the two most viable candidates should be a wake up call for everyone that the magnitude of this crisis is beyond the scope of politics. Political acrimony is not the solution, it's now the problem, spreading hate and anger virulently. Accelerating mental breakdown. People need to start taking PERSONAL responsibility to accept the inconvenient truth: The consumption oriented lifestyle is over, and the exorbitant cost of denial is about to be revealed...

The common theme of 2022 year to date, is that bad news keeps getting worse. Nevertheless, compliments of monetary euthanasia, the general populace is TOTALLY unprepared for what's coming. Over the past 14 years, the downside risks of economic collapse grew larger, so the lies by definition grew larger as well. Now, we live in a society that is addicted to sugar coated bullshit. Those who have not accepted the truth are NOT mentally prepared for what comes next.

I am not saying this is the end of the world, I'm saying it's the end of a way of life. 

What this society has to learn the hard way is that protecting people from adversity creates what Black Swan author Nassim Taleb calls fragility. We now have latent fragility in every direction, but most imminently in financial markets. 

Throughout the economic expansion the Fed conditioned investors to expect bailouts. Now, going into recession, the Fed has pulled the safety net.

It's beyond idiotic. Today we got confirmation that FINAL Q1 GDP is -1.6% while the Fed is pushing even LARGER rate hikes:

"U.S. stock index futures dipped on Wednesday after several Federal Reserve policymakers made the case for faster interest rate hikes to bring down high inflation"

What Powell said from Europe today was even more troubling. He basically acknowledged that recession is likely and even necessary to bring down inflation:

"Federal Reserve Chairman Jerome Powell said he was more concerned about the risk of failing to stamp out high inflation than about the possibility of raising interest rates too high and pushing the economy into a recession"

It's abundantly clear that Powell on behalf of his corporate overlords views wage inflation to be the biggest threat to corporate profits. And therefore he is willing to implode the economy:

Powell: "You have two job vacancies essentially for every person actively seeking a job, and that has led to a real imbalance in wage negotiating"

There it is plain as day. The first employee-friendly job market in 40 years must be exploded at all cost.

We have clear imbalances in negotiations:

Ironically and fittingly, crushing the job market means that the Fed is NOT going to be bailing out investors this time. In the process of crushing the middle class, the Fed will inadvertently crush the bailout class as well.

Unfortunately, investors are now ADDICTED to bailouts. Several years ago, former hedge fund manager Hugh Hendry predicted that monetary euthanasia would eventually lead investors to embrace risk even while the economy collapsed. He called QE the virtual simulation of prosperity and he predicted that the worse the reality of the economy became, the more investors would eagerly front-run large and dramatic monetary bailout. He was right, because now instead of fearing risk, investors have what I call fear of missing bailout. 

Investor complacency is rampant as indicated by low volumes, low VIX, low skew, and low put/call ratio. I predict that complacency will remain extreme until the explosion, at which point it will be too late to panic. Liquidity will collapse. 

What we are seeing is the extreme version of what happened back in 2008. Recall that in the book/movie "Big Short", Michael Burry was buying Credit Default Swaps (insurance) as a bet that subprime would explode. However, initially the value of those contracts DECLINED, because there were so many large investors writing those contracts to collect the fat default premiums. He lost a lot of premium money before he was ultimately proved right. Well, the same thing is happening now, only on a ludicrous scale. For the first time in U.S. history, financial stress is now INVERSELY correlated to the economy.  

If MASSIVE lies are what the people want, then they came to the right place, because there are no shortage of charlatans today telling the sheeple what they want to hear. File that risk under "confirmation bias" - a groupthink circle jerk taking comfort in the strength of numbers. What NO financial pundit ever tells the people is that the Fed CAN'T bailout the economy this time, because they have the least amount of interest rate buffer in U.S. history, ahead of recession. Which means that investors are complacently sky-diving into pavement:

Incipient recession

Record Fed tightening

Record low consumer sentiment

Imploding housing bubble 2.0 

Collapsing Tech bubble 2.0

EM currency crisis 2.0

Record global bond collapse

There is nothing these people won't believe, except the TRUTH

"What worries everybody is that all the risks are stacked on the downside"

In summary, when this society's thin veneer of fantasy gets ripped away, we are going to see the unvarnished reality. Those who have mistaken their fantasy life for the real one, will have their true selves revealed for the first time. And it won't be pretty. A facade of strength on the outside is no substitute for strength on the INSIDE that only acceptance of reality can bring.

ECON 101: THE FAKE WEALTH EFFECT

What business leaders, investors, and the Fed fear most is a wage price spiral that gets out of control deja vu of the 1970s. Fueling that concern, they see the CPI rising at the fastest pace in 40 years. Therefore it must be 1980 all over again, right? Unfortunately, a one year rise in CPI aside, this time period is nothing like the 1970s. Worse yet, mis-applying the Fed playbook from that era GUARANTEES a hard landing for BOTH markets and the economy...

GDP is a lagged indicator, which is why historically, it takes the Fed several quarters to officially confirm recession. Therefore, the only way they will stop tightening is if markets explode ahead of time. At which point, soft landing becomes no longer an option. 

Not surprisingly, it's Wall Street's base case scenario.

Forty years of deflationary Globalization, mass outsourcing and mass immigration later and today's economic "experts" somehow believe this is 1979 all over again. Back then, the U.S. middle class was at its apex - labor share of GDP was at an all time high and union membership was at an all time high. Fast forward to today and labor share of GDP is near all time lows as is union membership. None of this multi-decade economic carnage shows up in the official (U3) unemployment rate because it's calibrated to remove discouraged workers from the calculation. Meaning the long-term unemployed are systematically taken out of the economic picture. The best way to view the U.S. economy WITH the long-term unemployed, is via capacity utilization. This indicator ALSO takes into account "underemployment", meaning people who are qualified for one type of job but are working in another lower pay type of job. Underemployment is a direct result of serial mass layoffs and it's one of the BIGGEST problems this society faces, hence it's never discussed. 

 

Coming out of the pandemic, there was a ONE TIME surge in wages, which has been conflated as the beginning of "hyper inflation". However, going forward Chipotle workers won't be getting a COLA (Cost of Living Allowance) indexed to CPI. Subsequently, today's experts have ignored the fact that wage inflation is now lagging gasoline prices, food prices, asset prices, and corporate profits. Which is why the middle class is getting crushed like a tin can by the Fed's biggest policy error. Most of today's economic inflation is a result of the Fed's asset bubble. Hence their policy of tightening interest rates at the fastest pace in history is a TOTAL disaster.

Throughout this year, Wall Street has been catastrophically wrong on predicting both the economy and interest rates. At the beginning of 2022 no one was discussing recession NOR were they discussing Fed record tightening. Back in January, Goldman Sachs predicted four quarter point rate hikes i.e. 1% in 2022. The consensus on Wall Street is now at a 4% Fed funds rate by next January. In addition, not even the most bearish pundit i.e. me, predicted the Fed would double tighten their balance sheet in 2022 back in January. 

Granted, no one could have predicted the war in Ukraine, but even since the war started, Wall Street has been behind the curve on predicting where this is all heading. Which is why anyone who wasn't already skeptical of these central bank manipulated markets back in January, is now TRAPPED by  terminal bull shit AND CYCLE DENIAL. 

Today's pundits WRONGLY never questioned WHY markets sky-rocketed during a pandemic, when it was SOLELY due to Fed stimulus. Which is why now they also don't see Fed over-tightening as the BIGGEST risk in bear market either.

The widely believed "Pandemic Investment Hypothesis" has trapped investors in  BOTH the fastest Fed tightening and fastest recession in HISTORY. 

 

Per usual, it will take the Fed several months to figure out the economy is in recession. Therefore their current gambit of tightening at the fastest pace in history is a TOTAL disaster in progress. With each passing day it becomes more likely that markets will explode sooner than later. And when that happens, an economic soft landing becomes the LEAST LIKELY scenario.

And yet it's Wall Street's latest fairy tale to soothe scared investors. And it's the Fed's base case scenario as well:

Barron's June 22nd, 2022:

"The Fed’s focus on price stability “will be relentless” to avoid repeating the mistakes of the late 1960s and 1970s, “whatever the cost in terms of jobs and growth”

“Economic history points to a hard landing”

What happens next does not have recent precedent. The most similar analog is the 1930s. Back then the Fed was constrained by the gold standard from expanding monetary stimulus (aka. printing money). This time, they will be constrained by the zero bound.

History will say that the Fed's biggest error was believing that wages were the primary source of inflation, because, they were too busy trading stocks on their own account to admit their  own asset bubble was the PRIMARY source of economic inflation. 

Hence it will be the fastest demand collapse in U.S. history.

ALL SIGNS POINT TO LIQUIDITY TRAP

Central banks, pundits, and economists have collaborated to create the perfect conditions for deflationary liquidity trap. With no way out. The CONSENSUS inflation hysteria we are witnessing now is the inevitable ENDGAME for four decades of FAILED Supply Side Economics. MASSIVE supply with ZERO demand...

"A liquidity trap is caused when people hoard cash because they expect an adverse event such as deflation, insufficient aggregate demand, or war. Among the characteristics of a liquidity trap are interest rates that are close to zero and changes in the money supply that fail to translate into changes in the price level"

Milton Friedman famously asserted that "Inflation is always and everywhere a monetary phenomenon". Currently, global central banks are tightening monetary policy at the fastest rate in history and STILL what do economists and pundits expect? More inflation. 

They believe the Fed has permanently lost credibility and can no longer defeat inflation. I believe the opposite. The Fed will cut off liquidity until there is no liquidity left in markets and the outcome will be cataclysmic both to financial markets and the economy. Ultimately, the Fed's record panic tightening will render monetary policy totally ineffective, as the liquidity trap would predict. The last time a liquidity trap afflicted the U.S. was during the Great Depression of the 1930s. 

From an economic standpoint, the current predictions of simultaneous inflation AND recession AND record tightening are asinine and yet largely unquestioned. As today's experts DIDN'T learn in 2008, this is a CLASSIC end of cycle turning point from inflation to deflation. ALL of the end of cycle indicators are present. And yet, conflict of interest prevents most pundits from  EVER declaring the cycle over.

The University of Michigan surveys "Current economic conditions" are ALREADY at the lowest level in history and that is outside of official recession. Does anyone honestly believe that this current economic situation is the worst case scenario? THIS is the new 1930s? Of course not. This is only a minor taste of what's coming. No question, households are being squeezed by high prices in every direction. However, far too many people are accustomed to spending as much money as possible. The concept of frugality is a relic of a bygone era. Maxing out debt is the new normal.

Here we see via Fred, revolving credit card debt (flow) is sky-rocketing, and average interest rates are now 20%. 

What's coming is a combination of FALLING incomes and falling asset prices vis-a-vis FIXED liabilities. It's the worst case scenario from an economic standpoint. And at best the Fed will likely have ~2% of dry powder to lower interest rates. Which makes the liquidity trap the most likely scenario:

"The good news from all this bad news is that “contrarian theory” says that when sentiment reaches such historic lows, the only way it can go is up. Capitulation usually comes when sentiment is lowest. That makes record-low consumer confidence, like this, a positive indicator"

Previous lows came at the start of long bear markets"

No one is perfect, but when you say that prior lows came at the START of long bear markets, you are bound to cause mass confusion. One could argue that's a negative indicator, not positive. 

In addition, the assertion that sentiment can only go up from this point is patently ludicrous. So far, this has been largely an inflationary melt-up scenario. The deflationary meltdown phase is only at the very beginning. Consumers have yet to be TRAPPED by crashing asset prices, imploding incomes, and FIXED liabilities. In addition, they ALL have yet to realize that the Fed doesn't enough dry powder to bail them out this time - in markets NOR the economy. Which means the true deflationary "revelation" has yet to occur, and therefore consumer sentiment can only GO DOWN from here. 

The opposite of what is expected. 

 

So far, quantities aka. volumes are falling across all markets, which is what happens in a low liquidity environment - buyers and sellers move apart leading to less trading activity. In the next phase, "motivated" sellers will cross the spread and "hit the bid". This will lead to a re-evaluation of true price reality, when other sellers realize the market is accelerating lower. 

In the meantime, the Fed will be tightening their balance sheet by an additional $15b/month for the next three months: $60b in July, $75b in August, plateauing at $90b in September for the INDEFINITE future. Meaning they are going to starve ALL markets of liquidity during the summer, which is the lowest liquidity period of the YEAR. Good idea? Not really. $90b/month is DOUBLE the QT that imploded markets in 2018.  

Meanwhile, all this year, investors have been told that "Cash is trash". Which is why retail stock market inflows hit a record in 2021 and have continued at record pace during 2022. 

The collapse in consumer sentiment is definitive proof that social mood is rolling over. Hard. So far, the declines in stocks have been bought ALL the way down. Each rally has been shorter than the last.

Therefore, what is approaching is a global RISK OFF singularity that will suck all liquidity out of markets. When liquidity evaporates, getting out of markets will become impossible. Even small trades can move the market. The low liquidity conditions that have abided so far in 2022 have attended a BUYING spree. These same conditions have yet to be tested in a SELLING spree.  

What is shocking at this point in time is the unanimous consensus among pundits that inflation is the most likely outcome in 2022. 

In reality, nothing could be further from the truth. The conditions are now set to ensure that global deflation in the economy and asset markets is BY FAR the most likely and lethal outcome.

Basically a continuation of the 2008 meltdown, this time sans bailout.

Fittingly, the EXACT OPPOSITE of what is expected by Supply Side economics. The perfect biblical ending for those who NEVER learn. 

"Can you believe, it's ANOTHER housing shortage"

TRAPPED IN DISNEY MARKETS

The post-2008 era of monetary euthanasia has been a con man's paradise. Any false narrative could be bought and sold under the assumption that central banks were standing by to bail out markets. Sadly, none of today's fairy tales will end with happily ever after this time around...

So many fairy tales, where to begin...

During the pandemic lockdown investors were told that the Tech bull market heralded a new "virtual economy". All of the non-profit startup companies were "disrupting" traditional industry, rendering in-person business models soon to be obsolete. Any and all business could be conducted over the internet. They were selling dollar bills for 90 cents, financed by free capital. Then, in early 2021 as the lockdowns ended, left for dead shopping mall stocks and retailers suddenly exploded higher, led by the Gamestop mega short squeeze. We were told it was the new small investor revolution. Retail investors were the new "smart money" and the professional investors shorting stocks were now the "dumb money". Managing risk in the age of central banks, was viewed as foolish and obsolete. The mainstream media quickly ran with this new specious narrative under the guise of "democratized markets". Record new brokerage accounts opened and money flooded into the markets at the fastest pace in history. Throughout 2021, Wall Street mercilessly exploited this playground of non-profit concept stocks and democratized pump and dump schemes, for maximum profit. Featuring the largest issuance of IPOs and SPACs in history. Most of which are now on the verge of becoming worthless. Crypto currencies were bought under the assumption that the Fed money printer would render the U.S. dollar worthless. However, when the Fed "pivoted" to the most extreme tightening regime in history, the narratives never changed. Despite the fact that the rationale for buying no longer existed. Since then, all of the "cheap money" trades have collapsed. Because that's all they ever were - cheap money chasing fantasy narratives. 

This latest housing super bubble is deja vu of the last bubble. Back then adjustable rate mortgages and packaged subprime mortgages were blamed for the 2007 bubble. However, the REAL underlying cause for both bubbles is/was cheap money. Both times industry hacks convinced policy-makers that a shortage of supply was fueling higher prices. Therefore the solution to rampant speculation was to massively increase supply. It was a lie last time and it's a lie this time as well. And yet no mainstream pundits question it. We continue to turn to the same "experts" who were wrong in 2007 to seek their counsel this time as well. Back in 2007, the ratings agencies played a pivotal role in the overall housing Ponzi bubble. They gave the AAA ratings to the exploding packages of subprime mortgages cranked out by Wall Street. The same ones Michael Burry of "Big Short" fame predicted would explode the economy. Now he's predicting the same fate again. However, Fortune magazine instead of asking Michael Burry what he thinks, they are asking Moody's what they think of this housing bubble. No surprise they assume modest downside.

National housing prices rose 30% year over year. But they only see 5% downside on a national basis. Worst case scenario:

In other words, the home gamer fool reads the mainstream media moron who asks the corrupt rating agency if we have a problem. No problem. 

Greed is out of control. Von Misers tell us that greed is not the problem, only government bureaucracy is the problem. Unfortunately, that's another massive lie. Unfettered greed IS the problem and now it has spread to government institutions. During the Gamestop debacle last year, Congress and SEC wanted to know why retail brokers had prevented small investors from buying Gamestop - prudent restrictions which in the end saved people a lot of money. What most people don't realize is that Wall Street came in at the end of the super spike and shorted Gamestop at the top. THEY made the most money. But the common narrative is that small investors made the money at *smart* money's expense. Most small investors came in late and got wiped out. 

When greed is not held accountable then you end up in the situation we are now in, wherein every type of lie now gets bought and sold. Meanwhile government regulators look the other way or help to "democratize" fraud. One wonders how much of this monetary policy error is due to the fact that Fed members were trading stocks LATE into the largest asset bubble in human history. When they were forced to sell, that was the top for stocks. And one wonders how much of the regulatory lapse is due to the fact that Congress is STILL actively trading stocks. 

Last but not least is this cyclical inflation fraud masquerading as secular stagflation. The last and greatest bubble that has aided and abetted record inflows into passive stock market indexes at the apex of the largest stock bubble in history. Coming at a time when Boomers are at peak retirement and hence exposed to maximum risk aka. WORST CASE SCENARIO. 

No one believes this secular inflation narrative more than the Fed despite the fact that they were the last to be converted. Now, their belief in this latest fraud has put the entire system at risk.

Perma-bull Jim Cramer sums up the Fed conundrum:

“If Powell can get this market to go down and stay down, repealing much of those gains, then the rich are less likely to spend aggressively and a lot of people are more likely to remain in the workforce when they might otherwise have retired,”

Wow. That is the most bearish thing Cramer has said in a LONG time. Contrarians would jump all over that and presume that means a bottom. What they ignore is the fact that the Fed has ALL the power to crash this market and it doesn't matter anymore what market participants believe. Otherwise we would believe the current PRIMARY fantasy that the Fed can CREATE massive bubbles, but they can't burst their own bubbles.

Sheer idiocy.  

Cramer's logic is the paradigm shift that occurred last week on Wall Street. The Fed's panic increase in rates by .75% and re-rating of Fed increases through the end of this year has GUARANTEED hard landing. Everyone on Wall Street knows what's coming, which is why they just shorted stocks at the heaviest pace since June 2008. 

And yet, according to Goldman Sachs and Zerohedge, this is bullish.

ZH: Nasty Short Squeeze On Deck

"And predictably, following such massive shorting episodes, what follows traditionally has been a major squeeze: as Goldman's table below shows, returns following 20% S&P 500 declines have typically been positive"

What's scary is that Goldman's table in the article DOES NOT show what happens after each major shorting episode. Instead, it shows what USUALLY happens after each time the market is down -20% - which is totally unrelated. Unless you read that paragraph multiple times, you wouldn't catch it. In other words, they are MISLEADING the reader into believing that heavy shorting leads to big rallies. When in fact, the largest shorting episodes preceded MASSIVE declines. Particularly in 2008.

Had they shown this chart below, then any blind man would have reached the OPPOSITE conclusion, that this shorting and attendant mini short covering rally is THE LAST CHANCE TO GET OUT. 

In summary, anyone can believe whatever they want in Disney markets. Pundits are standing by to satisfy any and all denialistic fantasy. 

Sadly, the middle class can't sustain the high price of EVERYTHING at the same time. Which is why the first order effect we are seeing is falling sales quantity - of homes, cars, and durable goods. The second order effect will be falling prices.

At the aggregate level, Price x Quantity = GDP.

Which means that the Fed is actively crashing the markets AND the economy at the zero bound. 

With ZERO chance of a successful bailout. 

MELTDOWN MODE

The age of rampant fraud and corruption is set to explode in the faces of true believers who are now doubling down on criminality. What can they say but "No one saw it coming"...

TWO YEARS OF RAMPANT FRAUD:

Since the pandemic recovery began we've heard one lie after another, non-stop for two years. First we were told this was a whole new cycle, rising from the ashes of the shortest recession and bear market in history, following the LONGEST expansion and bull market in history. Then we were told that post-pandemic hyper valuations were justified by ultra-low interest rates and a post-pandemic economy strengthened by forced lockdowns. All of that of course was a massive lie. The pandemic stimulus merely pulled forward demand while the forced lockdown collapsed the supply chain and tightened the job market compliments of 20 million mass layoffs in the U.S.  Subsequently, ongoing China lockdowns and the Ukraine war created further supply-chain disruptions that continued since the pandemic. In addition there was rampant speculation in every corner of every market fueled by record amounts of central bank liquidity.

Now with global monetary policy tightening at the fastest pace in history, bulls are trapped in an end of cycle recessionary bear market. History will say that the pandemic was the melt-up phase of the longest bull market in U.S. history.

And yet even at this lethal juncture the massive lies continue, and by necessity grow larger. There is no bullish case at this point in time. Buying overvalued stocks in a recession with a panicked Fed making up monetary policy on the fly is financial suicide. As of this week, ALL of the 2022 economic predictions made by Wall Street at the beginning of the year are now NULL and VOID. FAR too optimistic.

STILL, no sign of fear or capitulation:

 

There have been more pump and dump schemes during the past two years than during the past two decades combined. In addition to Tech stock and housing market bubbles, there was an EV bubble, a cloud stock bubble, meme stock bubble, crypto bubble, Ark ETFs, and IPO/SPAC bubbles. And in 2022 there is now a massive commodity bubble. Which is a big part of what is driving what I call Ponzi inflation. Those bulls who think that commodities can't collapse like a cheap tent, were not around in 2008.

In this post-2008 cycle every manner of criminality has been arrayed against the public. Millennials are about to be exploded from every direction at the same time - homes, stocks, cryptos, salaries - ALL inflated by the pandemic.

An entire generation is now the new subprime. They are currently getting crushed like a tin can while the mainstream financial media says NOTHING other than to regale them with more fairy tales. 

It's DISGUSTING. 

WE did our part to warn the sheeple. Unfortunately, you can't warn zombies. I've tried. This monetary sponsored vacation from reality went on far too long and eventually sucked almost everyone into Disney markets. 

We have now reached the point wherein all of these MASSIVE lies will spontaneously explode at the same time. Trapping untold numbers of gamblers in their various beloved Ponzi trades. 

This week, Bill Gates said that Crypto is 100% a greater fool's game. That's true. However, at these valuations, stocks are a 99% greater fool's game with the benefit to the 1%. 

We also learned that the CPI is expected to ACCELERATE for the next four months in a row: 

Which means that the Fed has been FULLY cornered into tightening until they final implode markets sooner than later. Just as Millennials finally came to believe they will be bailed out of ANY market scenario, in 2022 the Fed has taken off the training wheels and pushed them straight off the cliff. 

So far, there has been no sign of panic or fear in these markets. However, it's only a matter of time before Millennials capitulate en masse because they've been trained by the Bernie Madoff school of investing to trade by consensus. When that happens  they will figure out the sell order for the first time in their lives.  

But when they all reach to sell at the same time, the machines will explode. There is no way that Skynet can handle that much selling all at one time. 

Remember February 2021? Millennials almost crashed the markets last year:

February 2021:

‘What I would like to point out here is that we have come dangerously close to the collapse of the entire system, and the public seems to be completely unaware of that, including Congress and the regulators.’

What took place last year will be minor compared to what is coming. Here we see Nasdaq down volumes have been climbing throughout 2022 back to the same dangerous levels from last year:

When Millennials get trapped in the casino and watch their fantasy wealth get obliterated, they are going to shit a brick.

THEN they are going to fall out of love with Wall Street and go back to the streets where they were ten years ago at the post-2008 nadir. Where they are going to BLOCK every single bailout attempt in Congress. 

And then EVERYONE ELSE is going to shit a brick.

What I call "BAILOUT RISK". 

And when that happens, every REVISED economic forecast being made this week will be off by a MINUS sign. 

After that, I predict the stock market will be DEAD MONEY. Meaning it will trade in a very wide trading range, but it will never be trusted in this lifetime. You can rent stocks, but you can't own them. 

In summary, I lowered wave '3' down to the ~50% decline range to reflect my INCREASED bearishness due to the simultaneous bear market, record tightening, and recession all confirmed in the exact same week. 

LEHMAN 2.0: MILLENNIAL EXPLOSION

It took 14 years for investors to forget the MAIN lesson from 2008: The cure for high prices is explosion. Only instead of subprime exploding, this time it will be an entire generation that explodes...

As I write, the Fed just raised rates by .75% in a panic move sparked by last Friday's CPI. Up until Friday, markets were pricing in a .5% rate hike which is already the largest rate hike in two decades. This one is the largest in three decades. Combined with QT at $45b/month, today's policy action was the most EXTREME tightening in U.S. HISTORY.

The Fed is playing a very dangerous game called outrunning recession. They are trying to raise rates as quickly as possible BEFORE recession sets in. And yet they fail to acknowledge that their own policies are accelerating the recession. 

Under the Cinderella hypothesis, the Fed raises rates to the "neutral" level aka. 3% as quickly as possible. Which gives them a theoretical buffer for THEIR ensuing recession. That strategy makes two ASININE assumptions. One that markets don't explode in the meantime. And two that recession isn't ALREADY in progress. 

Unfortunately, there are many signs that the economy is tipping into recession:

> Negative Q1 GDP

> Record low consumer sentiment

> Oil shock/inflation shock

> Bear market in stocks

> Elevated VIX

> Inverted yield curve

> Slowing housing sales

> Collapsed personal savings rate

> Recession-level car sales

> Collapsing durable goods consumption

> Corporate profit recession/Margin collapse

The Fed's own "GDP Now" real-time GDP predictor is currently at 0% for Q2:

If the past is any guide, what we know is that this Idiocracy will wait until recession is 12 months old before they declare it a recession.

Meanwhile, the vast majority of pundits are FULLY behind this SUICIDAL Fed policy. Jim Cramer is calling for "Monster" rate hikes as far as the eye can see.

Jim Cramer is in a VERY LARGE consensus of idiots, none of whom question Fed policy. 

What makes this entire gambit lethal is the fact that monetary policy operates on a lagged basis. So by the time the Fed realizes they've tightened too much it will be far too late to save the economy. The Fed has never attempted to raise rates when consumer views of the economy were anywhere NEAR this poor:

 

It took 14 years for everyone to forget the Lehman event in 2008 when the Fed was primarily focused on inflation:

What The Fed Got Wrong In 2008 

"The Fed’s understanding of the crisis, however, was clouded by its reliance on indicators that tend to miss sharp changes in conditions. The government initially estimated, for example, that the economy expanded in the first half of 2008 because it basically assumed that some economic trends, like the pace of business creation, had continued apace. The Fed also relied on economic models that assumed the existence of smoothly functioning financial markets, limiting its ability to project the consequences of a breakdown. And the outlook of Fed officials also reflected a deeply ingrained bias to worry more about the risk of inflation than the reality of rising unemployment."

All FOUR of those mistakes are now being repeated. First off, the Fed's own financial stress index is at record lows. Secondly, as I showed above the Fed is ignoring incipient recession. In 2008, the recession began nine months before Lehman. Third, the Fed is assuming that markets can handle this much liquidity withdrawal all at one time. An asinine assumption that will soon be system tested.

The Fed is now pushing the entire world into a credit crisis and their own financial stress index is now INVERSELY correlated to every type of risk:

Last but not least of the 2008 mistakes, the Fed is once again overly obsessing about inflation. 

In 2008 as they are now, inflation was their main concern and then it went away OVERNIGHT when markets went into meltdown mode. Monetary policy is a blunt instrument. The Fed has no control over WHICH prices come down. This week, the 30 year mortgage hit 6.3% amid signs that the housing hyper bubble is beginning to crack:

"The National Association of Home Builders warned on Wednesday that soaring inflation and higher mortgage rates are slowing home sales, with CEO Jerry Howard calling the combination a "perfect storm."

However, where today's pundits are truly clueless is forgetting the immediate impact that all of this tightening has on markets. 

Investors are NOT positioned for imminent deflation. They've been told all year that INFLATION is the biggest risk to markets. Which is why cash balances are near an all time low. 

We hear all the time how "bearish" investors are, yet a survey of wealthy Millennials indicates they have no fear whatsoever. They've only experienced 14 years of continuous monetary bailouts so they assume recessions and bear markets are relics of a bygone era. Banished by central bank money printing:

"Most millennial millionaires feel optimistic about the U.S. economy, with nearly three-quarters expecting improvements by the end of 2022"

In summary, inflationists deserve FULL credit for ensuring that once again no one sees this coming.

And for ensuring that gamblers are trapped in end of cycle trades in a deep recession with NO monetary bailout.

Prepare for rioting. 

THE HARDEST LANDING

Epic Fed policy error, groupthink pundits, and bailout-addicted investors are collaborating to create the hardest landing since 1929...

Today's pundits never tell the full truth because they're afraid of scaring their audience away. So instead they equivocate and spread mass confusion. They NEVER weigh one risk over another and come down on the side of full bearish. Full bullish for over a decade is fine. But full bearish is never acceptable. Which is why the public have been led to believe they can ride out any amount of economic dislocation in stocks. Yet they never question these fairy tales because they're now addicted to baby talk. They have an overwhelming need to be lied to continuously so they can avoid financial PTSD. Hence they will be fed financial pablum until their centrally managed financial Disney World explodes with no warning. 

At this latent juncture, the Fed is totally out of control. Six months ago they believed inflation was transitory, yet now they believe this is 1978 all over again. Powell desperately wants to be the new Volcker - a central banker who was vilified at the time, but later venerated for having the intestinal fortitude to "stamp out inflation". Because what could be worse than inflation?

Total global asset meltdown that's what. You see, what all of today's pundits have in common is that they don't understand the rules of Japanification. First and foremost a central bank must never over-tighten and cause an out-of-control asset crash. Why? Because they don't have the monetary tools to get it back under control.

The Fed currently has .75% dry powder. Likely going up another .75% to 1.5% on Wednesday. Still, that's not nearly enough to offset a financial meltdown. In 2000 and 2008 it took 5% interest rate reduction to halt the recession. So all the Fed has now is their balance sheet. But balance sheet expansion only works if markets are not in total meltdown mode. It worked great in 2020 because the Fed bought in size early in the crash and aggressively increased their bond buying on a daily basis. That's why it only took six months for the market to reach a new all time high. Conversely, back in 2008 the Fed made the EXACT SAME policy error they're making now by focusing on inflation instead of the market meltdown. So what happened then - stocks entered Death Valley and took four months to find a LOW much less a high. Then it took SIX YEARS to make a new all time high. Again, that's with the help of a 5% rate reduction. This time around, there will be a bigger crash followed by a far weaker financial and economic recovery. And there will be tremendous societal rage when the stoned zombies are awakened from their narcoleptic coma.

Here is another problem that NONE of these acid trippers have figured out - you can't properly measure "inflation" as a one year rate change coming out of a pandemic when commodities collapsed to a five decade low. Any blind man can clearly see that oil is LOWER than 2008, so how could inflation be the worst since 1980?

Gas prices adjusted for wages (lower pane), are currently LOWER than half the years SINCE 2008. 

 

The greatest source of inflation is due to corporate profiteering. Something the Fed has no control over. 

Here we see corporate profits over wages:

Adding to this epic buffoon festival, it's only fitting that the financial stress index is now positively correlated with consumer sentiment for the first time in history. Why? Because as the economy implodes, stoned gamblers have been conditioned to front-run collapse. On the presumption of imminent bailout.

As things get worse, their complacency increases. 

No surprise, gamblers are now trapped by moral hazard. They've been well trained to double down on risk and wait for their bailout. Sadly, no one has told them this time it's not coming. The Fed  has mistaken their complacency as a sign to continue tightening. 

The irony can't be overlooked. Both sides totally misreading the other, NONE bright enough to figure it out. 

ALL of this insanity should be very obvious, however nothing is obvious in an Idiocracy that believes printed money is the secret to effortless wealth. It should have been obvious a long time ago after the Dotcom collapse and the housing crash both PROVED that we can't continually borrow our way out of a debt crisis by further lowering interest rates each time. Eventually that gambit fails at the zero bound, as Japan and China have found out the hard way.

They've learned their lesson. Which is why no surprise BOTH Japan and China are in easing mode right now. China, also because they are driving their economy straight into the ground using their patented "ZERO Covid" policy. The most populous country in world history is attempting to have zero cases of COVID. It doesn't get any more idiotic than that. Which is why we will CONTINUE hearing about serial lockdowns and re-openings until their economy EXPLODES bringing ALL Emerging Markets down with them. Which is the next event "no one" sees coming.  

All of which explains how the Fed now finds themselves tightening monetary policy at the fastest pace in three decades in a confirmed bear market AND a nascent recession. When for most of the past decade they were continually SUPPORTING markets during expansion and bull market.

TOTAL INSANITY.  

It's all fun and games until someone loses an everything. 

And NEVER gets it back again.