Lying About The Economy Will Only Make The Coming Crash Worse

I don't know who needs to hear this. Wait, yes I do. The Biden Administration.

I really don’t know how to describe the disturbing trend over the last few months of the Biden administration, along with Treasury Secretary Janet Yellen, simply lying to the American people about the economy.

Months worth of political spin has culminated in embarrassing recent attempts to redefine the word “recession”: a futile effort to pull the wool over an American public that is growing increasingly suspect both Biden and Yellen’s competence to be overseeing the the country, and the economy, respectively.

By now, the administration’s pathetic falsehood of a narrative about our economy has been called out, ridiculed, dismantled and generally beaten to death by anyone with a shred of common sense.

However, there is something far more important that people aren’t talking about: the administration lying about the health of the economy could wind up exacerbating any financial crisis that we have in the near future.

Put simply, the more you tell people that “everything is fine” when it isn’t, the more surprised and shocked they are going to be when markets start to panic.

I don’t think a market crash is an outrageous scenario that has no chance of happening, either. I noted in my latest portfolio update that I thought the market could have a short-term rally based on the idea of participants thinking that the Fed is preparing to pivot.

But over the course of the longer-term, the rate hikes that have already been put into place are going to eventually make their way to the economic-narrative-foreground in the form of huge forthcoming aftershocks throughout the economy.

And so everybody who has been buying the dip over the last two weeks, whether it is out of FOMO, being forced out of short positions or a genuine belief that equities are now cheap, may still have to face pronounced upcoming market shocks.

The first shock will come in the form of the rate hikes that have already happened.

The Fed has hiked rates so quickly that the economy - with its record amount of outstanding debt - still has yet to catch up. Over the next quarter or two, we’re going to see the real effects of the 2% worth of recent rate hikes play out in the economy. And as Zero Hedge points out, it’s coming at the worst possible time: as the personal savings rate has collapsed to 5.1%, its lowest since August 2008.

Source: Zero Hedge

It is this delayed reaction that is, in my opinion, going to cause a repeat of December 2018’s market sell off. For comparison, the Fed hiked at nowhere near the current pace leading up to 2018. The hikes leading up to 2018 took almost 3 years to reach 2.25-2.5%.

This is why I believe an upcoming selloff will happen quickly and catch everyone off guard. After all, we have hiked to 2.25%-2.5% this time in just five months.

The second shock that people could be in for is if the Fed decides to hold its nerve and doesn’t begin discussing a pivot. Language out of the Fed was perceived to be dovish last week, but then the Fed’s biggest dove, Neel Kashkari, was out making hawkish statements over the weekend. Kashkari said Sunday:

“We are committed to bringing inflation down and we’re going to do what we need to do. We are a long way away from achieving an economy that is back at 2% inflation, and that’s where we need to get to.”

I have to say, I was stunned by Kashkari’s comments. They indicate to me that even the most dovish of Fed members may still be posturing for a fight against inflation. If this becomes the case, the Fed pivot story immediately comes off the table, risk appetites have to re-adjust immediately, and there is still a very real case that the market needs to move 30%, or even 40%, lower than current levels based on the historical mean of the Buffett indicator.

Whether or not this happens all depends on how spineless the Fed is and how the government reacts to the first signs of real panic in markets. Judging by Democrats like Elizabeth Warren already lobbing criticisms at Jerome Powell for “crashing the economy”, I don’t think the Fed or the government has the nerve to sit back and watch it all burn down.

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But most importantly, let’s get one thing straight: the Biden administration re-assuring the American public that everything is fine economically, when it isn’t, is only going to make matters worse.

The American public will be that much more surprised when they can no longer service their debt because rates have moved higher.

They’ll be even more surprised that there are no more stimulus checks on the horizon. 

The average American will also be surprised when the market starts to crash because of a 2% hike in rates. Most people don’t grasp how seismic of a move in rates that is for the amount of debt outstanding that we have.

Finally, the American public is going to be surprised when everybody capitulates and they become part of the deleveraging snowball effect.

The veracity and intensity with which the American public starts to panic once the economic screws get tighter will be a direct result of how the current administration is calibrating their expectations for the economy going forward. 

Telling the public that we’re not in a recession isn’t Keynesian economics, it’s Keynesian double speak. The Fed and the administration are no longer content micromanaging the actual financial variables that make up the macroeconomy, they have to now reduce themselves to changing the definition of words.

In terms of calibrating the expectation of investors to the market going forward, this is an egregious sin. When the shit starts hitting the fan - and it will - I don’t want you to be surprised when you see the headlines about how shocked and caught off-guard everybody was by the fact that a sharp market selloff took place so quickly.

Just remember, when it happens, that if the Biden administration offered up a shred of truth about the economy over the last couple weeks, it wouldn’t be as bad as it’s going to be.