Tuesday, June 7, 2022


The sum total of serial failure is coming home to roost in the worst way possible. The final magnitude of this economic disaster is now visible from outer space, and it has now officially become a Category 5 Shit storm...

The so-called "elites" are totally oblivious to the plight of the middle class. Hence they are the LAST ones to see this coming. For the first time in history the economy is collapsing AHEAD of the stock market. That can only happen when the ruling class is locked in a circle jerk of lethal proportions. In my last missive I laid out the bull and bear case for the stock market. In this post I will review the history of how we got here and why our policy-makers are doomed to fail on a biblical scale. 

The late 1990s capped off a two decade bull run that was only briefly interrupted by the 1987 crash and the 1990 Gulf War recession. Both were mild events by historical comparison. The late '90s featured a Tech-driven melt-up that stumbled during the Asian/Russian /LTCM Financial crisis of 1998. Up until then the Fed had been normalizing monetary policy by raising rates. The LTCM bailout and attendant rate cut set the stage for a melt-up rally into the Y2K Millennial date change. The Fed was reluctant to raise rates in 1999 because they wanted markets to be well liquefied going into the seminal date change. Which set off the final stage blow-off top Dotcom bubble. By May 2000 the Fed was playing catch-up and hiking rates at .5% per meeting. By the end of the year the Tech bubble had collapsed -60%. 

Sound familiar?

The Dotcom recession began in early 2001 and got worse with 9/11. Stocks finally hit bottom in 2002 with the Iraq war. The Fed rate was at 1.5%, down from 6.5% at the Y2K top. It took a FULL 5% decline in rates to put a floor under stocks and the economy. Low rates continued just long enough to inflate the housing bubble, which had started years earlier and continued growing through the Dotcom bubble. The Fed then slammed on the brakes with 17 consecutive rate hikes and burst their own monetary-driven housing bubble. Their next trick was the 2008 bailout and ZERO % interest rate policy. Japanification had arrived: The zombification of markets and the euthanization of investors with "free" money.  

What followed was a boring but metronomic rise in the stock market amid tepid economic growth. Stocks rose in lockstep with the Fed balance sheet. Every attempt to stop QE and/or raise interest rates led to a market crash. This monetary dependency continued until 2016 and the Trump election. When Trump was elected, the futures went limit down. But by the time the U.S. market opened green, the promise of a tax cut was making the rounds on Wall Street. The FISCAL melt-up began, which allowed the Fed to raise rates and pare the balance sheet for the first time since 2007.

It was all going well until late 2018 when the glue fumes from the tax cut had worn off and the Fed reached for one more rate hike in December 2018. Global markets imploded. Trump demanded Powell reverse policy which he did. It was off to the races again. However, the Fed cut rates three times in 2019 as "insurance" and they began expanding their balance sheet to deal with the "repo" crisis.

And then the pandemic hit, which is where this all gets interesting. 

The pandemic had two long-term deleterious impacts on the economy which we are now confronting. First off as we all know it clusterfucked the supply chain. Inventories of everything became depleted. Double ordering ensued. Consumers hoarded merchandise. And THEN the tsunami of combined fiscal and monetary stimulus hit the economy. So not only did the supply curve shift in, but the demand curve shifted out. From an economic standpoint, that meant MORE demand and LESS supply and therefore higher prices of EVERYTHING at the same time. What happened during the pandemic is the WORST thing that could happen late in a cycle, because it has NEUTRALIZED monetary policy. 

Fast forward to 2022, and now all of that stimulus is receding. There's only one problem. The price of EVERYTHING remains at record highs. So just as consumers are seeing less income, they are being asked to pay more for everything. 

Where today's pundits are ALL wrong is in assuming this is 1979 deja vu when the middle class was at its apex. Today, union membership is at an all time low. Which means workers have very little bargaining power. Sure, they've benefited from a tight labor market, but that doesn't mean they've recovered from 40 years of wage deflation.

Contrary to popular belief the economy did not float back from China which is why U.S. capacity utilization remains at record late cycle lows. 

Which means that the middle class is under economic duress from all sides - record gas prices, record food prices, record home prices, record car prices, record durable good prices, rising interest rates. All at the same time. It's no wonder that consumer confidence has collapsed down to the lowest levels in decades. And YET, our elitist financial pundits constantly inform us that the consumer is strong. Invincible.

How the hell would THEY know? They have no first hand experience AND they are now totally ignoring consumer sentiment polls. For some reason. 

All of which is why this Fed is making a COLOSSAL error late in the cycle with no monetary safety net, with all of today's idiotic pundits along for the ride. The Wizards of Fed will be the last to know that their magical money powers have been rendered inert. 

Meanwhile, clueless gamblers instead of de-risking, are doubling down into the abyss on the belief that everyone else is going under the bus. 

Soon to find out they ARE everyone else.