Jerome Powell burst the stock market bubble by publicly acknowledging there will not likely be a “V”-shaped economic recovery. He indicated that it will take years for the economy to return to the recent levels … we experienced just a mere four months ago.
That was actually the point of my recent article that unfortunately became, in the comments, all about my disclosure and not about the article’s theme. So, I’d like to go back to that theme, now that even Fed Chair Jerome Powell supports it at the market’s expense.
The Fed now having set the expectations that rates will remain at least at zero … has inadvertently revealed a major gap in narrative: That of a V shaped recovery presumed by markets and a Fed signaling with zero rates through 2022 that there is no V shaped recovery in the offing, rather a protracted high unemployment environment that is entirely inconsistent with market valuations north of 150% market cap to GDP.
If headlines about COVID-19 resurgence had not become the rage so quickly again, only two weeks into reopening in most states, and if the country were not sinking quickly into renewed civil war so quickly, exacerbated by police appearing to shoot a fleeing Black man in the back three times in Atlanta (though the guy did turn to shoot the police with a taser he stole from them), I would still anticipate the superficial good news of reopening will feed the “V” narrative and fuel stupidity even higher for the biggest blow-off top in Fed-fueled history … until the narrative failed.
In fact, the irrational exuberance is running so hot, it still might survive all of that … for a little while longer. However, as Lance Roberts writes,
The surge in COVID-19 cases in the U.S. undermined the “V-Shaped” economic recovery meme…. The issue remains that the markets have priced in a “V-shaped” recovery, which is well ahead of what the economic data suggests…. There were two catalysts that ignited the sell-off on Thursday. The first, as stated above, were headlines of a surge in COVID-19 cases…. The second, and probably more important reason, was what the Fed didn’t say following this week’s Fed meeting.
As Sven Henrich (Northman Trader) also summarized at the market lows, the recent climb in irrational exuberance was no surprise to someone, like myself (or himself) saying this was going to be a historic crash:
The 1929 redux tells us a big rally will come and this rally will be awe inspiring, it’ll produce technical reconnects in a market that is now widely disconnected to the downside and it will bring back optimism. But then the historical script suggests lower highs to come as the world is then confronted with the consequences of the costs of extinguishing this fire. The bill comes due as the world will be settled with even more debt, but now a much higher unemployment rate, poorer consumers, and companies focused on margin efficiencies.
The only surprise (for me anyway) was in how the Fed crashed the party since it usually does all it can to talk the market up and save it at any expense.
Subsequently, the Fed has offered new salvation in the form of corporate bond buying to prop up zombie corporations whose debt is about to become junk so said zombies can stay alive like the walking dead by eating themselves in the form of refinancing their stock buybacks.
Maybe that is the Fed’s penance for crashing the market, or maybe it new it was about to do that and chose to send the market down last week to cool it a bit for the new heat hit.
As Lance Roberts wrote,
Unwittingly, the Fed has now become co-dependent on the markets. If they acknowledge the risk of weaker economic growth, the subsequent market sell-off would dampen consumer confidence and push economic growth rates lower.…
That makes the idea that Powell would intentionally try to cool the market a little unlikely, but cool it is exactly what Powell did. Powell, in fact, pushed it over a cliff into a pool of glacial melt.
“Federal Reserve Chairman Powell delivered a cautionary economic message for not only this year but for several years to come…. There was mounting evidence that Covid-19 is still not tamed.” While Fed liquidity is currently fueling a “bull market,” the “bear case” still has teeth. Eventually, the market will fill the gap between “fantasy” and “reality.”
Powell says economic activity far below pre-pandemic levels despite ‘modest rebound’ in some areas.
In other words, the recovery is not V-shaped. The quick rebound is uneven across the economy with some parts doing terrible, but the good news in the good parts is what the market is hearing (as I said would be the case, and so it’s going back up again … for now).
Federal Reserve Chairman Jerome Powell on Tuesday suggested investors shouldn’t overreact to surprisingly good economic data like the May retail sales report.
Which is what I was trying to say in that previous article the market almost certainly would do. The Robinhood investors and other retail investors would fasten on the immediate good news from recovery and ignore the deeper truths lurking beneath the surface:
Powell acknowledged some economic indicators have pointed to a stabilization in activity and others have even suggested “a modest rebound…. That said, the levels of output and employment remain far below their pre-pandemic levels, and significant uncertainty remains about the timing and strength of the recovery.”
That’s the deeper underlying truth, and there will be great deal more to come as we see what doesn’t recover and what gets hit with knock on effects.
Economists think the indicators could show a strong rebound in May and June but then the economy might falter.
The initial ride on the recovery rocket was certain
History virtually assured a rocket ride rebound from March’s fall as the bulls are slow to give up their ignorance, and their testosterone drives their brains. (Notice I said “brains,” not “thinking,” as there is very little of the latter during these temporary rushes back up.)
History does not, however, assure a rocket ride as high as what we saw over the last two-and-a-half months, but that is because history has no example of a rebound with this much Fed fueling or the benefit of instant economic reopening coming out of a forced closure or of trillions of instant government spending intended to send the market back the other way by a president completely sold out to Wall Street.
“The early part[s] of this recovery are going to be in a way easy because they are coming off such low levels,” and this might last through July, said Mike Feroli, chief U.S. economist at J.P. Morgan Chase. “After that, the story gets a little more interesting,” Feroli added.
This bounce, with all of those things behind it, had more fire power backing it than any bounce ever seen. We’re not talking a measured amount more. We’re talking a nuclear bomb more. And, still, it is struggling to attain the previous market highs (other than in the Nasdaq).
The Fed is mired in its own mess
That only makes it all the more apparent that the Fed is essentially dead, as I said it would be when this recession got here. Even one of Deutsche Bank’s top execs said back in 2017 this day would come:
There will come a point when “the spiraling trajectory cannot continue indefinitely; it has to stop at some point beyond which there will be no more bubbles. In many ways, it looks like the post-2008 represents the last lapse. A new game has to be reinvented for the old future to materialize, or a different paradigm altogether has to take over….” The events over the past three months were just that event.
The new game, for the moment is QE4ever. The only thing new about it is that this one will continue until the whole economy is a smoking pile of rubble. Powell already assured everyone it will continue, a least, through 2022.
QE, however, will never again boost markets as effectively as in the past or restore the economy back to its old sustained lows seen in 2019, but QE can never be removed either because its removal would cause total global economic collapse greater than any ever seen.
Central banks have for a decade built a financial world utterly dependent on sustained QE in all markets — stocks, bonds, cash, commodities — except precious metals, but they have that market cornered and rigged, to protect themselves.
Capitalism died in this process, too:
Stated simply, central banks have taken on the role of the communist politburo, which micromanages the economy similar to what the USSR did for 5 decades, however to avoid allegations that capitalism is now dead and minimize references to the gruesome collapse of the USSR when central planning resulted in too much capital misallocation and … inefficient enterprises, culminating with the collapse of the Soviet Union, the Fed’s role had to be framed as merely a temporary one.
This brings us to the present, where in the aftermath of the Fed’s grotesque takeover of capital markets following the March crash, Kocic writes that “here we go again, the state of exception is back, although this time it is really different.“
Why? Because … the strategist agrees with what we have been saying for the past decade, namely that “with every new crisis problems have become deeper and more difficult to manage” which was to be expected in a world in which constant bailouts from central banks prevent a normal corrective process to occur as the imbalances and excesses continue to pile up, resulting in ever greater shocks to the system, requiring ever greater bailouts, and even greater debt, i.e., borrowing from the future until, as Eric Peters, recently said “We Have Reached The Point Where The Entirety Of Future Prosperity Has Been Pulled To The Present.”
You may recall I’ve been saying all of that for a long time, too.
This time the Fed is going to have so many plates spinning due to all the problems its own policies and bailouts keep causing to build up within the system that it will not possibly be able to manage them all. Since the very day I started writing this blog (and even before when writing just in newspapers), I’ve said that we, by following the Fed’s plan, are refusing to bear our painful correction and are only assuring the pain of correction will be far worse to handle in the future.
That future is here. That’s why I call this “the Epocalypse” (economic apocalypse).
By voting to avoid short-term pain, the Federal Reserve has locked the economy into a long-term economic malaise.
The first stage was the shutdown with a sharp drop in activity and that may end at the end of June. The second part will be the “bounceback” with people going back to work. “We’re seeing apparently the beginning of that,” Powell said. The third stage will be the economy “well short” of the pre-pandemic level in February.
Last week, the triumvirate of Trumpian finance — Larry Kudlow, Steven Mnuchin, and Jerome Powell — all could not put the king’s market back together again when it fell off the wall. The market ignored them all. In fact, Powell helped shove it off the wall.
Not only does Chair Powell not see a “V”-shaped recovery taking place in 2020, but he envisions that it ill be a very long and arduous road back to the levels of economic growth that we saw just four months ago.
Besides COVID-19 rising again to attack the V-shaped recovery delusion, Powell, in what is believed to be his usual speaking ineptitude, seemingly leaked out a little bit too much truth about how much this is NOT going to be a V-shaped recovery, even with the Fed doing all that it can, such as promising zero interest all the way into 2023!
The following summarizes the details Powell gave as to why this narrative is unfounded and will fail, as my earlier article intended to state (though the only point anyone got out of it seemed to be me betting that the stupidity would continue just a little while longer and higher as it now seems to be trying to do again. My apologies.):
Fed Chair Powell’s downbeat assessment of the way forward [threw] more cold water on the stock market’s hopes for a V-shaped recovery, saying that the COVID-19 outbreak was causing “tremendous human and economic hardship across the United States and around the world.”
The Fed laid out the following large list of the details of economic destruction, saying the …
Collapse in demand may ultimately bankrupt many businesses.
Services activity has dropped more sharply than manufacturing.
Social-distancing requirements and customer attitudes may further weigh on the recovery in travel, tourism, restaurants, and recreation.
Some small businesses and highly leveraged firms might have to shut down permanently or declare bankruptcy.
Business dynamism and innovation may suffer.
Widespread failure of small businesses could adversely alter the economic landscape and potentially slow the recovery.
Persistently weak consumer and business demand may mean persistent deflation.
The path ahead is extraordinarily uncertain.
The significantly increase in government debt may add to sovereign risk.
The economic damage of the recession may be quite persistent.
That’s a pretty long list of horrible outcomes! It’s even more notable for how candidly the normally reserved Fed is speaking the truth about how bad things are likely to be and for how long. The Fed actually sounds almost like me … as if even the Fed is catching on to what an Epocalypse this is going to be and how difficult it will be for the Fed to help get us out of it. They seem to be paving the way for mercy from the masses if they fail and great patience if they are to succeed at all.
While Powell talks about the long extent to which the Fed will maintain zero interest and QE on steroids and how the Fed will even increase the already supersized QE if necessary, the market last week heard only the words that painted a bleak picture of a long, dark recovery-free zone, so it fell upon news of years of additional Fed stimulus.
This week, the market is dusting itself back off because of that new corporate bond interference the Fed promised to run to shore up stock buybacks and because Trump promised a new trillion-dollar infrastructure stimulus package.
Like I said, no end to QE because even the government stimulus packages require QE to fund them, something congress questioned Powell on, but he denied the Fed is monetizing the debt.
As for my statement that Fed stimulus is forever now, Powell’s own words claimed,
We’re not thinking about raising rates. We’re not even thinking about thinking about raising rates.
Notice the triple emphasis on not “thinking about” it. That’s another way of saying, “Recovery is so far off — so vastly far from any hope of being V-shaped — that we’re not even willing to think about what we might do when we eventually get back to stable ground.”
Powell’s foolish mistake was to caution markets the US is going to face “an extended period where it will be difficult for many people to find work.” The blithering fool. If only he’d said … “We promise to keep giving investors free money so they will believe the economy is in great shape.”
Truth hurts, but the Fed cannot admit it is QE4ever. Congress questioned Powell about that:
Powell said the central bank wasn’t buying asset to make it easier for the U.S. Treasury Department to sell the increased debt. This is known as “monetizing the debt.”
“That is certainly not our intention,” Powell replied.
The Fed’s asset purchases were needed because financial markets stopped working when investors all decided to move to cash.
“It wasn’t in any way about meeting Treasury’s supply. We really don’t think of that,” he said, adding there is a lot of demand for Treasurys.
Sure it isn’t! (Did you hear the dripping sarcasm?) That is one of the reasons this has to be QE4ever. The massive funding of the exploding, elephantine government debt is forever, and there are no longer enough buyers without the Fed to fund it.
“There is great uncertainty about the future“
Here, again, is Powell’s speech, which covers some of the bullet points above. (Others came out of the Fed’s written statement.) Notice, as I mentioned in my last article, how nervous Powell looks and how grim he sounds — something Fedheads try their best to avoid in order to project confidence that will keep the market from plunging as it did right after Powell’s speech:
Lawrence Fuller comments that the Fed …
has wasted all its ammunition trying to prop up financial markets in recent years. It no longer has what it takes to support the economy in this time of crisis…. I can no longer tell whether Chairman Powell is stupid or simply playing dumb, based on some of the answers he gave to questions posed by journalists.… To suggest we will have zero-interest rates until 2023 means that there is not likely to be much of a recovery at all, and it certainly won’t be the V-shaped one that the stock market has already priced with this bear-market rally.
I never thought I would see the Fed be this blunt or sound this lacking in confidence; but that just demonstrates how this really is the Epocalypse we’re descending down into and how truly the desperate the Fed’s situation now is.
This may be a first in history for Fed candor about how bad truly are, and Powell’s constant lip biting and swallowing heightened the impact.
Some economists thought May’s jobs report issued just a few days ago, which showed 2.5 million jobs were created last month after April’s sharp losses, was a good sign.
Powell said the report was a welcome surprise but just one month’s data.
“I think we have to be honest, it’s a long road,” Powell said, pointing out there are 20 million people who are displaced in the labor market.
So, as I said in my earlier article, there is no V-shaped recovery coming, and those bidding the market up, thinking we’re just going to cruise right back up that great American economic slope, are hopelessly deluding themselves.
The Fed is trying awfully hard to convince everyone the hardship is going to last a long time, and that’s not the Fed’s normal modus operandi. It knows it cannot expand its QE much beyond the current pace without creating those huge economic distortions mentioned earlier in this article that will devolve into total chaos. If it goes beyond the level it’s at, the economic distortions will go beyond what the Fed is confident it can control.
The Fed is dead.
There is no “V.”
Reprinted with author’s permission from The Great Recession Blog