Thursday, December 8, 2022


The bond market is signaling that a biblical magnitude policy error is now in progress...

Largest yield curve inversion since 1980:

What pundits and the Fed all forget is that when Volcker purposely over-tightened in 1980 to bring down inflation, he had 19% Fed rate buffer. In the event, they used 10% of it. This Fed currently has 3.75% of downside buffer. According to Zerohedge/Bloomberg, the Fed will now need to cut rates by 5% in 2023. That will be difficult if the Fed rate is below that level when the Fed pivots as bulls expect will happen any time now. 
So it is that the best case scenario for markets happens to be the worst case scenario for the economy.

Ironically, the best performing trades of 2022 are now unwinding into year-end. I am of course referring to the inflation trades led by oil/commodities, and energy sector stocks. 

Inflationists have informed us all year that inflation is NOT transitory. The Fed believed them. Now the inflation trade is collapsing like a cheap tent. To be followed by CPI on a lagged basis.

At minimum, we need to more accurately define the term "transitory" - Is it days or weeks? Because it's clear this society has not even the slightest ability to differentiate between long-term secular inflation and cyclical end of cycle inflation.

Soon, even the most dim witted observer will realize this is not 1980. Too late.

The inflation trade was nothing more than yet another Ponzi trade wherein the only winners were first in and first out. 

All of which means that the next market/economic bailout is science fiction. The Fed is caught between a rock and a hard place. Any effort to "normalize" rates will cause more economic damage and require more rate buffer to offset the downside. If they pivot sooner than later, then they lack adequate rate buffer to offset depression. 

Back in 2015, the Fed collapsed global markets mid-year, led down by China. Then markets rallied back into the end of the year. So the Fed tightened and caused the next leg lower. 

So far, this year is following the same pattern:


In summary, the inflation trade is over, and the recession trade is bid. Nevertheless, complacency reigns supreme because investors are patiently waiting for their next bailout:

Pundits and investors using the post-2008 playbook now assume the Fed can bailout investors from any type of dire situation. They are convinced that printed money is the secret to effortless wealth. 

If that were true, the Japanese stock market would be at infinity. Instead of waiting to re-implode any minute now.