The Economy

This might be short-term capitulation, but we'll see. Nasdaq gave back 6 months of gains over the prior two weeks.

Here is the thing. Anyone looking for a fundamental reason for any of this is still clueless.

This is all the Fed and whether easy money and all the liquidity they pumped in is going to finally come to an end.

The Fed has signaled that after it finishes tapering the debt purchases (they should be done around March), we are looking at rate increases and possibly them not rolling over expiring bonds on their balance sheet, which is the equivalent of quantitative tightening (although they won't call it that).

So this is happening right now without them having turned off the liquidity spigot yet. We are still in the midst of loosest financial conditions in history, which is propping up a lot of things that are way, way overvalued.

Quantitative Easing since the financial crisis created the mother of all bubbles. Quantitative tightening, plus the rate increases, undoes that. So if they follow through to any degree?

We have been there 3 times, 2013 2015 and 2018, when the Fed gave all kinds of warning and then tepidly tried to extricate from the wall they have backed themselves into. Each time, when risk assets started to deflate, they came right back. Pure cowardice.

The reason that this is different. ... Inflation. They have stoked it with how much they blew up the money supply, combined with the fiscal spending that came on the back of their debt monetization.

If they reverse course again, they keep stoking the inflation problem. If they deal with inflation, they pop all the asset bubbles, and that is going to create financial instability, because there is so much mispriced debt out there due to them.

On top of it, we are getting economic data that suggests this isn't just runaway inflation. The economy is running slow. i.e. -- stagflation.

The markets, which have been conditioned to expect a "Fed put," don't know what to do. A lot of people running money have never seen a rising rate environment and what it does, let alone an unwinding of $9 trillion (or some portion) of debt purchases by a central bank.

This is going to be a very interesting year. Unfortunately, they recklessly put us in a place where there won't be good choices. I'm not even talking about the people who got sucked into buying dogshit stocks or NFTs or silly cryptocurrencies, although I feel bad for them. This has the potential to get very messy for the central banks.

 

BTW, there is a Fed meeting tomorrow and Wednesday that culminates with a rate decision @ 2 pm on Wednesday and then Powell flapping his gums @ 2:30.

A lot of tea leave reading goes on around their releases.

This one will be big.

If they back off the more hawkish language because of what is happening in equity markets, or Powell even waffles a little (true to form) relative to the more hawkish talk they had been throwing out as trial balloons (and what has caused this correction), markets will stabilize and probably bounce quite a bit.

If they are still signaling rate hikes and balance sheet reduction, or even somehow sounding more hawkish, you'll get the opposite.

It's really hard to predict. He wants to calm markets down. But the pressure to deal with the inflation problem they've unleashed on us means tanking the bubbles they blew. The strategy of hoping it magically goes away and calling it "transitory" hasn't worked.

 

The Dow was down 1,115. It's nearly in positive territory.