It's very hard to make the u-turn from boom to bust, when you don't see it coming...
We're receiving glimpses of this impending horror story, but only pieces at a time. We hear about this economic implosion or that one, but no one wants to put the pieces together to assemble the impending disaster. Which makes for a con man's paradise. One in which a public wanting nothing to do with the truth finds ample con artists willing to meet their inflated demand for bullshit.
This week it's highly likely the Fed will tighten at the fastest pace since 1980 in the exact same week we get confirmation of recession. Q2 GDP Now is currently at -1.6%, the same as final Q1 GDP. The very definition of recession.
Which is why policy-makers are now attempting to redefine the standard definition of recession from two quarters of negative growth to "whatever we want it to be". As in something wholly subjective that will contain the growing sense of panic. The fact that this is an election year will in retrospect be viewed as a key factor burying a lot of people. Just as 2008 was a critical election year featuring all manner of inflated bullshit right up until the Lehman meltdown.
Fortunately for policy-makers, investors are now fully conditioned to believe that recession is a buying opportunity which is why complacency is rampant. In the same week we are witnessing what will likely become the greatest economic policy error in modern history, the Fed's Financial Stress Index just reached an all time low. With a stress index like that, who needs enemies?
Two quarters of negative GDP and a flattened yield curve, but recession is not inevitable yet. The 2s/10s yield curve has successfully timed every recession in the past 30 years.
Government economists have successfully timed ZERO recessions.
Do you know what would make a recession LESS likely? RECORD tightening during a period of extreme economic uncertainty. Because what could go wrong?
Ok, so the Fed is hellbent on burying everyone.
We are told that investors have "capitulated", however there is no sign of that anywhere other than in subjective sentiment surveys. The money has to go somewhere. And in an "inflationary" environment the last place it goes is cash. People don't want to buy stocks, but they are told they have to. Otherwise, they will lose to inflation.
Similarly, from a consumer sentiment standpoint, retail sales unadjusted for inflation remain high even though consumer sentiment is at record lows. People are conditioned to buy and to borrow as much money as possible. Why? Because an inflationary environment favors the borrower. Prices go higher and inflation-adjusted liabilities go LOWER. Unfortunately, in a deflationary environment, it's the opposite - prices go lower and inflation-adjusted liabilities go HIGHER. Which is the scenario we are now about to enter - an inflationary collapse. Which is arriving just as most people have been TOLD to believe that inflation is NOT transitory.
And amid all of this chicanery, economists cling to their linear economic models, which in no way can make the u-turn from inflationary boom to deflationary bust. Linear economic models are useless at the end of the cycle. However, that doesn't stop economists from using them. Today's economists are on the cusp of losing ALL credibility.
So it is that we learn about the housing market imploding. The Tech sector having mass layoffs, the car market seeing a spike in repossessions, AT&T customers not paying their bills anymore, commodity markets imploding, and yet it all adds up to soft landing.
Which gets us to the latest most popular investor narrative - rate hikes this year followed by rate cuts next year to mitigate recession. Unfortunately that fairy tale implies a 5% Fed Funds rate by the end of 2022 from 1.5% today. There has never been a recovery from recession at anything less than a 5% Fed rate EXCEPT the pandemic which required fiscal and monetary QE at a combined level of 15% of GDP. Yes, you read that right.
NONE of which risk is priced into stocks right now. What IS priced into the stock market is a soft landing. In a run of the mill recession, stocks decline 20% which is where they are now. In a deleveraging recession such as 2000 and 2007, stocks decline 50% or more.
Which means that what we've seen so far in markets is the denial phase. Which will be followed by the investor panic phase. And finally the Fed panic phase.
One other UNPRECEDENTED risk that NO ONE mentions is that regardless of investor sentiment and Fed rate hikes, the Fed will be draining liquidity at record levels for the indefinite future via Quantitative Tightening.
Never mentioned.
Now, consider the fact that the U.S. is doing better than the rest of the world. Europe, China, and Emerging Markets are imploding in real-time.
And there's your bull shit market. If that's your thing.
