The multi-decade collapse in interest rates to the zero bound was driven by mass outsourcing, mass immigration, and of course mass automation which was accelerated by the infinite rate of return implied by "free money". This theory that record low interest rates could abide infinite valuations as the economy collapsed, will soon be viewed as one of the greatest mass delusions in human history. After 2008, the patented borrow-your-way-out-of-debt crisis gambit worked so long as economic growth remained stagnant.
Then, along came the pandemic at the end of the cycle which foiled the Fed's attempts to normalize interest rates for the first time in history. The pandemic forced the Fed to record ease into pandemic-exacerbated global supply chain bottlenecks. The worst case scenario for end of cycle normalization. In addition, pandemic fiscal stimulus programs drove up demand for durable goods as services collapsed. And then QE drove up asset prices into the largest asset bubble in world history.
Now, investors are trapped in what I call the Fed punishment zone.
Why? For ignoring end of cycle risk, which came back with a vengeance as soon as the economy re-opened.
Now it's all unwinding, however the decelerating rate of economic change has concealed the end of the cycle. Goldman Sachs said just this week that "soft landing" is STILL on the table. When the year started, Fed futures predicted four rate hikes for 2022, now they're predicting 16 rate hikes, but the soft landing is the same:
We are to believe that the longest cycle in U.S. history was corrected by the shortest recession in U.S. history - two months - featuring not only NO de-leveraging, but a massive increase in debt. The pandemic was the first time in history that corporate debt rose during a U.S. recession.
Over the next two weeks amid incipient global meltdown, the ECB and Fed combined will attempt to raise interest rates by somewhere in the range of 1.5% (.75% each). This is 6x the amount of monetary firepower that exploded global markets in 2018 (Not including the Fed's double QT gambit).
It's a dumbfuck idea, in the tradition of ever-increasingly dumbfuck ideas.
Which means I'm all for it.
Fortunately, for today's con men, by the time the public realizes this is all a massive con job, it will be far too late.
Because as the first chart above clearly shows the NBER has an unbroken history of declaring recessions long after most of the stock market damage is already done. And that's just fine by Wall Street, because what else can they say when official confirmation arrives, but it's too late to sell, you may as well ride this one out.
Which explains how investors end up BURIED in the "valley of death" wherein returns are negative for years if not decades.
Any questions?
