No sooner are we starting to hear louder and louder rumblings about Credit Suisse on social media…
…and no sooner did the Bank of England capitulate to avoid its “Lehman Moment”…
…than we are starting to see the very first cracks start to emerge in the Fed’s otherwise “steadfast” positioning on rate hikes.
The first sign, as I pointed out last week, was a headline that the U.S. Treasury was “eyeing” the turmoil in the United Kingdom with “growing alarm”.
Then on Friday came a scoop from Fox Business News’ Charlie Gasparino, who took a break from doing pullups to drop the news that Fed officials are getting “worried about ‘financial stability’ as opposed to inflation as higher rates begin to crush bonds”.
Gasparino then says the Fed is worried about another “Lehman Moment” (literally the same language that was used to explain the Bank of England’s pivot. Gasparino wrote: “A Fed watcher told me the UK intervention was not ‘a one off’ and the same systemic risk could happen here, which might cause the Fed to pause.” He then said the Fed is now concerned with “systemic risk”.
Finally, on Saturday, a report dropped from Bloomberg highlighting how the Fed - which has been surprisingly unified on its course of action over the last 9 months - is now starting to become divided on policy.
“Federal Reserve officials are starting to stake out different views on how fast to raise interest rates as they balance hot inflation against rising stress in financial markets,” Bloomberg reported first thing Saturday morning.
“Their comments injected a slight variation into what has been a uniformed stream of insistence from regional Fed presidents declaring unflinching resolve to crush inflation.”
Call me crazy, but it looks like we could be in the early innings of controlling the narrative around a policy change. After all, I have continued to argue that something is going to break publicly (and likely has already broken behind the scenes) that will force the Fed - who is consistently behind the 8 ball - to pivot regardless.
I still believe the market has much further to fall, as I explained my reasoning on yesterday, but for some type of drastic narrative shift out of the Fed almost immediately. Meanwhile, my friend Kenny Polcari thinks that a Fed pivot simply isn’t happening.
You can read Bloomberg’s brand new article from this morning here.
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I always hesitate when attempting to predict the behavior of organizations like the Fed (or the Biden admin or the DNC or the RNC... etc., etc.) The thing that experience has taught me is that they will knowingly and brazenly lie about their course and its perspective changes. That has been the case for anything of consequence especially if/when perspective changes in course seem inevitable.
These people are cunning. They not only want to maintain "the story" (even if they know they'll have to change course), apparently to save face and avoid critical examination of their existing course, BUT they will also lie about the inevitable change of course after the fact even (or especially if) everyone knows the real story and called it all along.
No matter what "the thing" is... they'll continue to say that they're staying the course, even knowing they won't, and then when they change course, they'll describe it in a way where it was just a natural continuation of what they were already doing -- even if that is a patently-obvious in-your-face lie.
That's apparently "the beauty" about politics. They're never ever wrong about anything. Just ask them (if you enjoy a nice serving of unbelievable bullshit).
And then, these lunatics have in mind the complete destruction (aka "global reset") of industry and the economy. So while I believe that they will change course, I don't know that for sure because of their obvious psychopathy. If they think they will change course, they're not going to indicate. That's how it works.
What is coming is the GREAT FRACTURING.
And when all nations and peoples are begging for glue, guess who will step in to fix things?
Pain relief comes at a price, of course.
I think a lot of people assume that "pivot" means reducing interest rates and returning to QE right away. It's more likely that "pivot", at least short term, means raising rate at 25 basis points instead of 75, or a meeting or two with no increase at all. It probably means reducing QT to some number below $95 billion per month rather than an immediate return to QE. We'll get there eventually, but they're going to do what they can to save face.
The Fed has put itself (and us) in a hell of a pickle and there's no way out without a lot of pain. At this point we're looking at either very high long-term inflation or a historic collapse in employment, equity prices, etc. In reality, at this point it looks most likely that we're going to get both.
Chris, you should really effort to get Luke Gromen on the Podcast.
The Fed is not going to rush into a pivot. Timing for them is key, as the one thing Powell has going for him is he's positioned the dollar as the strongest currency on the table. If the Fed can avoid any emergency moves until their next scheduled rate hike, they may be able to simply hold the line where interest rates are now. Even if they have to ease by being the last bank to pivot the Fed keeps the dollar as the strongest currency on the table.
Great article and also the previous article I believe a major bank either SoftBank or Credit Suisse or both are going insolvent. I also predicted that the Fed would remove the Fed put and we would be going to 3,000 SPX, even if something fails would they pivot unless it was serious enough? They want asset prices to crash, that’ll make a huge dent into inflation and the labor markets.
The Fed has been approaching this inflation wrongly. It is my belief that this is supply side inflation, which means that we don't have enough labor inputs or materials or energy. Those are the three things you need to increase supply and lower the price on the curve.
Well, rather than destroy demand (raise interest rates), they should be focused on shifting the supply curve. Policies like reducing unemployment benefits (the duration, mostly), welfare, lowering taxes, cutting government spending could be used to help bring back labor into the mix, which is what I think is largely driving this inflation. Force people to become productive.
The secondary piece of this is energy, which started after Biden came into office. The solution there is very simple: go all out on everything -- fossil fuels, renewables, nuclear -- all of it. Put so much out there that everything becomes dirt cheap. This is why the Trump economy soared, because oil was sho cheap and plentiful. This, by the way, would also crush Russia, and solve another big problem at the same time.
With labor and energy coming down, your cost of materials will come way down. You will have then essentially stopped inflation and perhaps even deflated the value of these things, thus reducing the pressure on the demand/supply curve upward. And we would have done it without any demand destruction, thus keeping the jobs we have in place and people employed.
To me, just raising interest rates and reducing the money supply are throwing out the baby with the bathwater. It's a sledgehammer when a scalpel will do. You can creatively fix this with broad based--but specific policy--and signals to the market that these things will become plentiful again.
Will they do this? No. So we will end up in a very painful exercise of punishing interest rates and beating our heads up against the wall until the economy starts dying. Then they will look they "did the tough thing," but all they did was stick a sword in a once-thriving economy.
Any barbarian can do that.
If the Fed pivots, how high will they allow inflation to go? 20%? 40%? Argentina here we come?
Higher equity prices are counter to the inflation fight. Powell knows this. Recession hurts some. But inflation hurts all. Powell knows this. The talking heads on CNBC act like SPX 3000 would be some sort of armagedeon. Powell knows this is not true.
Eerily similar to 1920/1921
What we have here is the massive short on the dollar represented by the Eurodollar is being squeezed. The rise in interest rates is destroying the value of the long dated dollar debt used as collateral. This is inducing a whirlwind of short collateral calls, spinning outward.
The center will not hold and unless the Fed starts madly buying long dated debt the center will hit the beaches and wipe out everything.
I can smell the sweat from the Fed offices where I live.
PS. The Swiss bank has spent large amounts of Swiss money to buy SP500 and similar US assets to back its currency. This is an example of how a US financial collapse can scrape across the world.