Thursday, September 15, 2022


Lethal doses of bull shit are reaching the point of hot air explosion...

The eagerly anticipated pivot to depression will seal the fate of this buffoonish Idiocracy. Their best case scenario is now the worst thing that could happen to markets and the economy. 

Last week Mohamed El-Erian warned investors to get out of these "distorted" markets and hide in cash and short-term t-bills. I highly concur. What makes El-Erian credible is that over the past year he warned the Fed was moving far too slow on inflation and that they ran the risk of slamming on the brakes down the road. And he was right, because that is exactly what they are doing now. They are compounding their earlier mistake of easing for too long by making a larger mistake of tightening too quickly. At the beginning of this year, Goldman Sachs predicted four rate hikes for all of 2022. Now many people are calling for four (1/4 pt) rate hikes NEXT WEEK.

Not the least of which is Harvard dunce Larry Summers:

"Just a couple of days ago we were debating whether 50 or 75 would be sufficient,” he said. “100 bp would be perceived as a panic move.” 

Recall that the Fed panicked in June after the CPI report. They had been telegraphing a .5% move but after the shock CPI they did a .75% increase which sparked the beginning of the summer rally. No doubt many bulls are assuming the same thing could happen now.  

However, this time the set-up is substantially different. 

Peter Boockvar explains:

Sept. 13th, 2022:

"The next rate hike is going to be only the second time in 40 years that the Fed funds rate is going to exceed the prior peak in a rate hiking cycle"

“This 75 bps rate hike might even be a mistake. We know there’s a lag.”

One day later, Jeff Gundlach goes much further saying that these serial mega rate hikes are turning deflationary:

Sept. 14th, 2022:

"The action of the credit market is consistent with economic weakness and stock market trouble"

Gundlach now sees deflation — a fall in the overall level of prices — as the key threat to the economy and markets"

"Buy long-term Treasurys, because in spite of the fact that the narrative today is exactly the opposite the deflation risk is much higher today that it's been for the past two years"

Gundlach goes on to say he's not talking about next month, he's talking about next year.

I'm talking about NEXT WEEK because this is becoming a binary equation similar to 2015 and 2018. However, on 10x scale.

The world's richest man, Elon Musk is also now FIRMLY in the deflation camp as well. He has made it clear that business is slowing. 

"Impending deflation is neither subtle nor secret"

Of course this whole problem stems from the fact that the Fed uses lagging indicators to set interest rate policy. So just as last year the lagging indicators ignored soaring commodities and strong consumer, now this year the lagging indicators e.g. CPI, are ignoring crashing commodities and buckling consumer. 

Regardless, I only showed the above opinions to prove that the deflation theory is now going mainstream.

It doesn't matter what these pundits think the Fed should or will do next week because the damage is ALREADY done. Whether the Fed pivots sooner or later, they have ensured a depression at the zero bound. When they made the mistake of delaying rate hikes far too long, their only real option was to hike rates as quickly as possible before the economy and markets crashed. However, now they are trapped halfway in between the zero bound and normalization, in no bailout land. 

As we see in the chart below. 

Clearly, the Fed's other big mistake was totally ignoring the yield curve and the signals the bond market is sending. The inverted yield curve is saying that yes there is high inflation today, but the Fed has already tightened enough to bring it down in the future. Meanwhile, there were no recoveries in the past 50 years with less than a 5% Fed rate, EXCEPT the pandemic which included the largest fiscal expansion in U.S. history fully monetized by the largest QE in history. Neither of which is going to happen this time around. 

On an Emerging Markets basis this current set-up makes BOTH the 2015 and 2018 pivot scenarios look like a picnic. Which means that the binary "pivot" trigger of global market crash is closer than ever.

This is the definition of optimism:

In summary, the amount of hubris taking place right now is ludicrous. Investors have been conditioned by central banks to ignore all risk. And in turn investor complacency is now feeding back into central bank rate policy error. It's a hubristic death spiral.

An entire generation of NEW investors has known nothing but continuous monetary bailouts. They believe that recessions and bear markets are a relic of the past. So it's highly ironic that at the end of the cycle the Fed is removing all chance of a timely bailout.

I call it a "paradigm shaft"


Jim Cramer claims it's too late to sell. He believes the worst is already over. Many bearish pundits such as Jeff Gundlach are calling for a further 20% decline. However, even that is likely highly optimistic. Today's investors believe that a one month bear market corrected the longest bull market in U.S. history. If you measure the ratio of each bear market in months to the duration of the preceding bull market, this is the ratio you would see for the 2020 one month bear market relative to the 2009-2020 bull market:

It's clear now in hindsight with all of the late cycle indicators flashing red, that the pandemic was not a true bear market. It was merely the pullback prior to the final melt-up of the post-Lehman rally. A massive sugar rally fueled by unprecedented stimulus. 

Stimulus of such a magnitude that the Fed literally has no way out, other than to collapse markets and the economy.

And they lived happily ever after.