The Economy

Fed minutes from the last meeting were released @ 2 pm, and they surprised a bit by mentioning balance sheet runoff and a fourth rate hike.

What they say and what they do are two different things, but there was a lot of panic selling today, as a result. The most bubbled up equities and cryptocurrencies got hit.

On the balance sheet, they have been buying bonds hand over fist. Even with their "taper" when bonds mature, they buy more to replace them, so the quantitative easing doesn't become quantitative tightening unless they stop replacing those bonds. Nobody anticipated that. Last time they tried to run off their balance sheet, markets freaked out and their bubbles started to pop, and they reversed course and stepped in with even bigger and more radical intervention to keep things propped up. This time around, a lot of the maturities they own are shorter in duration, so if they actually follow through, the effect will be felt quicker.

I think they are living in fantasy land. They have broken the debt markets and they can't reverse all of their buying without popping the bubbles they created. And that has broad economic consequences. Unfortunately, though, there is broader price inflation hammering people in addition to the "inflation" that has created a lot of stock market millionaires. So they are under political pressure.

40 percent of all U.S. dollars have been created in the last 12 years. Their arrogance has unleashed a genie they aren't going to be able to control now.

 

Weird jobs number just now. They were expecting something like 400,000. Whisper numbers were over a half a million. Came in @ 199,000.

But if you look deep, it looks like there were more than 600,000 people in new jobs, but it somehow netted out to 199K, and I don't know how it reconciles. The unemployment rate, which is a farce, is now down to 3.9 percent.

The immediate stock market futures reaction is pure schizophrenia. Immediately up because bad news is technically good news. ... the Fed has been threatening tightening, the computer algo reaction was, "maybe this will buy the bubble more time." That didn't last long, though, so now who knows how things shake out today.

The Fed minutes from the last meeting on Wednesday, started a cascade of selling because they talked hawkish. There is always a big divide between their bullshit and what they actually do, and financial conditions are the loosest in history right now, even as they have talked hawkish. Real rates are deeply negative. The market doesn't want to just crash, because 1) the bond market is baking in that they really won't be all that hawkish because for 12 years there has been a Fed put and it has conditioned people to speculate like there is no risk, and 2) Even if they do tighten to any degree and let some of their balance sheet run off, when the markets throw a hissy fit, the assumption is that the Fed will be right back in.

The problem for them now is. ... inflation. There was a 5 percent print in Europe last night. They have now risked all of their credibility. Even though they have increased the money supply by 40 percent in the last 12 years, prices were only rising by about 2 percent a year (insidious enough) due to the offsetting technological and productity gains that the Fed squandered away. We should have been in a period of glorious lower prices and higher standards of living.

So now they are backed into a corner. ... they have blown the biggest asset bubbles in history, taken housing prices to unaffordable again and created mountains of misallocated debt. And prices of things like milk and meat and clothing is now taking off on them too, with the pandemic not allowing more productivity gains to offset any of it.

To anyone who has gotten sucked into things like the cryptocurrencies or all the dogshit stocks with no earnings trading at huge multiples, what we are starting to see is nothing. Markets still have a Fed put baked in. If the Fed ever loses complete control (like they did in 2007/8), or if they deliberately really do stop price fixing the debt markets they way they are starting to threaten to because of inflation (not likely), it is going to be a freefall in a lot of things. They tried it in 2018 and cowards that they were they stepped right back with even more radical intervention when the markets started to tank, taking their balance sheet up to $9 trillion of debt that they way overpaid for and keeping the overnight rate pinned at 0 percent. All to blow a bubble that has had no real impact on the 60, 70 percent of people who don't have stocks, except seeing their grocery bills run away on them. The only thing propping up all the speculative assets that went nuts are the belief that they are still the same cowards and won't exit their price fixing role willingly, and they certainly won't do it heading into the midterm election. But if you own most stocks right nor or a home for speculative purposes or any of the crypotcurrencies, you shouldn't delude yourself that that is what you are betting on. The sad thing is that it has been a good bet since the financial crisis.

 

I've posted variations of the point this guy was making a number of times on here.

From the Toronto Star, of all places. He's dead on.

Opinion | Is the U.S. purposely under-reporting inflation? It’s hard not to wonder when you look at how it’s calculated