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.
