Tuesday, August 2, 2022


Bulls will be happy to know that I have officially downgraded my economic forecast to economic armageddon aka. "BTFD"...

mor·al haz·ard

lack of incentive to guard against risk where one is protected from its consequences”

The Fed is clueless. Investors are complacent. Wall Street is corrupt. What's new?

Before considering any market forecast one must first discern whether or not the pundit is operating under the post-2008 rules or pre-2008 rules. The vast majority of today’s commentators are operating under the continuous monetary bailout rules that have abided since 2008. Those readers who believe THAT era still applies, should proceed straight to CNBC and Zerohedge for your daily financial infotainment enema.

This is for those who believe that the era of continuous investor bailout was always going to end with a widely embraced swan dive straight into the economic pavement at the zero bound. 

First off, we are witnessing an unprecedented event wherein the economic data is deteriorating faster than the markets. Which is a function of a Fed believing that inflation is "sticky" and therefore willfully ignoring all escalating signs of economic risk. It's clear they are not concerned that their actions are accelerating economic meltdown. The Fed has never been adept at managing soft landings and currently their own economic models predict only 10% chance this time. Hence it’s the consensus bet on Wall Street.

The Fed and investors have reached a deadly standoff. The Fed needs investors to reduce risk to bring down asset prices. Investors however expect the Fed to capitulate and bid up markets. Neither side has blinked. Yet. Therefore, the Fed is forced to continue tightening until investors capitulate. In the meantime, the economic data continues to steadily worsen.

So far, there is NO sign of fear from investors.

Institutions have been taking down their market exposure all year due to the rising economic risk. However, this has been a very orderly de-risking process with no sign of panic. As opposed to 2020 when both the VIX and market volumes skyrocketed. 

Individual investors have largely stayed the course and remained over-invested in stocks going into recession.

The housing bubble has now become the locus of primary risk. Home prices are collapsing at the fastest pace since 2008. Housing inventories are rising at the fastest pace in history and are already at a level previously associated with deep recession and economic deleveraging. Add in an over-priced auto market beginning to implode, durable goods slowdown, consumer debt skyrocketing, semiconductor glut, PC/mobile phone decline and soon you are talking about the entire market ex-narco-pharma and Disneyland.

Coming off of last week’s Fed rate hike, many pundits are saying it’s too early for a Fed pivot. Nothing could be further from the truth. It’s too LATE for the Fed to pivot, because economic risk is already past the point of timely bailout. At this point the Fed should jack rates up as fast as possible so they can turn around and slash them back to zero. Gain some altitude before the crash. 

The Fed will never be able to pivot in a way that rescues today’s investors who are already over leveraged on risk. The Fed pivot will be a step along the way to investor wipeout. Investors are now trapped by the bailout rules that applied since 2008 and the pundits who espouse them: Meaning, the worse the reality of the economy becomes, the greater the expectation of large scale bailout.

Russian roulette with no spare chamber.

None of what I am saying makes any sense to those who have no memory of real markets prior to 2008. Back then valuations mattered, bad news was bad news, and the mantra was don’t fight the Fed. Now, all of that has been turned on its head.

Market reality has been on vacation for 14 years and now it’s returning home to economic apocalypse. Bought with both hands at the zero bound.

The unforeseen cost of bailing out financial criminals who are now predominant across the financial media.

Booya skidaddy!!!