Having written my own articles about how we are going into recession dead ahead, I want to back those up with the chorus of alarmed comments everywhere now about Powell is power-diving our economy straight into a recession.
Conversations throughout the cabin about our imminent demise
The warnings of Michael Wilson, Morgan Stanley’s chief equity strategist, will come as no surprise to any who know him because he usually does lean more bearish than the rest of his colleagues who fly the friendly skies, united in toasting the stock market. He writes of a big hit to consumers now that the last of stimulus checks have flown past us and says the added worry of war…
…materially increases the odds of a polar vortex for the economy and earnings.
More of a surprise, that permacheer, hyperseller of stocks with gold in its name (you can easily guess who that is) now joins in unison with the perennially bearish Wilson:
One of the reasons for the sharp drop in risk assets today is not just the resurgence in geopolitical concerns but also “the potential the economy may be slowing more than expected.”
That is about as much of a warning as you can expect from the social adept GS, who uses every breath to sell stocks. GS also notes what I call the money pump in bonds where, as risk-off fear clobbered the stock market, money flowed into bonds as “perceived safe havens” yesterday, pushing the yields on bonds temporarily back down, as I’ve described. (See: “The Money Pump is Working to Drain Stocks … and There is No Safety Shutoff!“)
The take home here is that between MS and now Goldman, the reality of a much faster economic slowdown than virtually anyone had penciled is starting to emerge, and with it the cognitive dissonance that will now sweep across both Wall Street and the Fed, which will now have to scramble to reassess the central bank’s tightening intentions, especially if the US may be facing a recession (as soon as the second half of 2022 according to BofA’s Michael Hartnett) when the Fed is still at zero and still buying bonds!
Not at all unsurprisingly Zero Hedge is zeroed in with certainty (just as I am) that recession is at our doorstep and quite a monstrous one at that: (I put it one step inside the front entry, though, but cloaked and standing beside the coat rack so that few recognize it it is here.)
The runaway inflation crisis … will only get worse until we finally reach a breaking point where the Fed will lose all control over inflation expectations, sparking what may become hyperinflation, currency debasement and collapse … and the end of the Fed itself which will no longer be relevant in a world where a 2% inflation target is no longer applicable.
OK, that’s strong, but ZH quotes the Fed’s leading repo expert for insider support — the man who helped convince me of to make my predictions of the Repocalypse back in early 2019, who now says the Fed has no legitimate choice left but to force the stock market and all other markets down in order to fight inflation and do so as quickly as it can … but softly:
In a startling note from one of the most respected Wall Street strategists, repo market guru and former NY Fed official, Zoltan Pozsar … not only echoes all of our “tinfoil conspiratorial” thoughts but even goes one step further suggesting that “We need a Volcker moment… a Volcker moment, where Vol stands for “vol” – as in volatility.” In other words, Pozsar writes that the Fed needs to crash the market to contain stocks….
As Rabobank’s Michael Every writes today summarizing the Fed’s predicament, “more worrying is that [the FOMC] were non-committal about what the Fed will do at its March meeting because the Fed has no idea what to do. All its choices are bad. There is no oasis ahead, as markets like to believe. There is no Fed ‘masterplan’ to stop inflation without stopping either the asset-price appreciation we’ve built markets on for decades, or the faux appreciation for the working class we’ve built markets on the backs of for decades, or both.”
Rabobank’s Fed-watcher Philip Marey expands on this: “…Policy rates are at the zero bound and the Fed is still buying assets when GDP growth is 6.9%, CPI inflation is 7.5% and unemployment is 4.0%. Is this rational monetary policy or are the lunatics running the asylum?… The Fed’s groupthink has produced another failed strategy that should be terminated immediately.” But let’s not hold our breath: the Fed will continue to swagger arrogantly around as if it knows best, and things will get thrown and broken.
But it’s Pozsar who summarizes the dilemma facing Powell best:
“The FOMC has one big problem: inflation…. The Fed aiming to slow inflation via a recession is unimaginable. Hikes today then are meant to slow inflation without a recession … which is not something that the Fed has ever managed to achieved before.…” [Therefore, Pozsar suggests] “Volatility is the best policeman of risk appetite and risk assets. To improve labor supply, the Fed might try to put volatility in its service to engineer a correction in house prices … equities, credit, and Bitcoin too…”
Does it sound like the passengers are alarmed, and does the Fed have the remotest hope of pulling off that pin-point, soft landing?
In other words, the Fed’s one best choice for putting out the flames of inflation now is to bring the housing market, stocks, bonds and crypto all down together … without causing a recession. Good luck with that, yet that is the only plan Pozsar can suggest — the crash-everything-softly plan. While Pozsar is not saying recession is here, he IS saying the Fed must do exactly the thing that has always caused a recession in the past. He is just hoping the Fed can accomplish what it never has … a soft settling of all assets together, rather than a hard crash.
More to my recession-is-now point, he says they must do all of this immediately in the following manner:
Maybe the Fed should hike 50 bps in March, put an end to press conferences, and sell $50 billion of 10 -year notes the next day… Maybe FOMC members talk too much. They don’t keep the market guessing. They suppress volatility…
Sounds like a crash course to me. The Fed must, within a month, surprise all markets by doubling down on its promised interest hikes and by immediately launching all-out quantitative tightening (QT) … and stop talking so much. In other words, they do all this, announce what they’ve done and then not explain any of it to the press. They should go back to being the old-fashioned Fed we had in Paul Volcker’s day where the Fed operated shrouded in mystery. Following Pozsar’s prescription for a non-recessionary simultaneous lowering of all markets without further Fed comment, says ZH, would end like this:
…and then maybe the Fed should watch an unprecedented social panic unleashed the next day when the S&P plunges more than 50% to its ex-Fed fair value, and flee to a non-extradition country when yields – not just overnight rates but long-term rates too – explode into the double digits as hyperinflation is unleashed.
Indeed, Fed officials better have their plane tickets in lapel pockets when they hold that FOMC meeting and, as Pozsar suggested, skip the press conference … but do so in order to skip out of town as quickly as possible.
The Powell put-her-into-the-ground plan
And this, says Pozsar, is really the Fed’s best and only option right now. Don’t even mess with extending the landing gear. This has to be a nose-cone-planted soft landing! The Fed must land its 747 full of all the nation’s major markets inside the space of a cul-de-sac! Never done before or even attempted, so good luck with Pozsar Plan One!
This is why I have said repeatedly, the Fed would end up trapping itself to where its best plan is now, according to one of its best navigators, to attempt a soft landing by piloting its 747 nose-cone-into-the-dirt because that is what happens if you do what Pozsar describes as the Fed’s best exiting flight plan.
While Powell may ignore the collapse in stocks, it is the upcoming implosion in the increasingly illiquid credit and bond markets (discussed here two days ago) [and at length in my last Patron Post, “The Big Blond Blowup,” another soon coming about the bursting of the housing bubble, as Pozsar now agrees must happen] that will shock the Fed out of its stupor when the central bank (and Pozsar) see the US economy grinding to a halt as interest rates explode higher in a crisis that will make March 2020 seem like child’s play by comparison.
Oh, to be Powell now — captain at the helm of that 747 when the flight tower radios, “Send her into a steep dive aimed at the cul-de-sac below you and reverse thrusters to slow the crash. You’ll be fine. The wing span will fit exactly between the houses on opposite sides of the cul-de-sac if you hit at the right angle. Move everyone to the back of the plane. That will give you a hundred feet of airplane ahead of you to soften the impact.”
Good luck with Plan One.
Even respected Wall Street strategists such as Citigroup’s finance guru, Matt King, has suggested that the Fed can only bring down inflation by curbing demand, in which case it will need to slow growth in order to ease inflation pressures… although King also warns that while the economy needs many more rate hikes to remove the inflationary overheating, stocks will crash long before this terminal rate is hit, writing that “neutral rates for markets likely well below neutral for the economy.”
In other words, “reverse thrusters” and good luck with that. Or, as Powell said before the last round of QT,
I think there is a pretty good chance that you could have quite a dynamic response in the market.
The only alternative, as I said — and as BofA’s chief investment strategist also now says — is to let inflation do all the dirty work for you by setting the 747 on fire:
Hartnett writes that on Saturday Oct 6th 1979 the Fed hiked 100bps (11% to 12%) in response to disorderly 12% inflation.
The Fed just held an emergency meeting, and while it did not put in place the 50bps emergency hike that I speculated about, it did decide to expedite its tapering, deciding it will now end all QE by March 9, which is a week ahead of its FOMC meeting. That, of course, frees the FOMC to go straight into interest hikes without the peculiarity of continuing the Fed QE through March while starting interest hikes (which would have been like tromping on the brake with your left foot while holding your right foot down on the gas pedal). It rushes all QE off the table completely three weeks from now.
This is the third time the Fed has expedited its tapering schedule (once when it announced tapering sooner than most expected back in October when it had been saying until that moment “inflation is transitory,” then in December when it doubled down on its rate of tapering and set it to finish around the end of March, instead of June, and now that it has moved the terminus up to early March to squeeze it in ahead of the FOMC meeting so that the FOMC can leap straight into interest hikes). Thus, as I wrote all of last year, hot inflation will grow hotter, and the Fed will be behind the curve, so inflation will force the Fed to taper faster and then to taper faster still. Here we are:
As Hartnett notes, US inflation of 7.5% now exceeds Mexican inflation of 7.1%…
That’s always a good boat to be in: Slightly worse inflation than a nation whose peso routinely crashes like the currency of a banana republic. Apparently, Powell is flying MexAmerica Scarelines. When you look at your pilot, and he looks like this with boney white knuckles gripping the yoke…
…find a parachute.
Fed policy is still at 0% interest, while Banco de Mexico is at 5.5%; so, yeah, the Fed is a bit behind the curve. “Take her into the ground, Powell.”
Of course, the Fed didn’t just fill the fuel tanks with Fed fuel, it has soaked the entire plane in it and stashed the hold full of jerry cans of jet fuel. This emergency landing should be fun with all that accelerant already on board, but it just gets better. The Fed is still adding fuel at the rate of $200 billion in QE over the past month and it decided to keep adding until March 9 just for good measure … and then reverse all thrusters.
The bulls, however, are still all sitting forward in first class, knocking back cocktails and cheering each other over how smart they are! It’s hard to believe, but I still have people writing to tell me what an idiot I am for thinking this thing is going to go down hard and soon, while trying to convince me there isn’t an air pocket in our flight plan or a recession anywhere in site, quoting such things at those hot retail numbers I just wrote about. (See: “Government Statistics at it Again: They Adjusted Your Recession from Hell to Heaven!“) Better tap the altimeter, folks, because it’s stuck, and the spiraling ground is a lot closer than you think.
Hartnet says right now we’re on an ascending flight path to core inflation of 7.8% by the end of this year if the Fed doesn’t do the dive (from a current core of 6.0%). That’s core inflation, the kind that strips out all the inflationary jet fuel like fuel prices. That would put official headline inflation around 9%. Notes Harnet,
Call it what you will (wage-price spiral, 2nd -round effects, unanchored expectations)…it ain’t transitory.
He says that doing anything about that requires immediately diving into the “beginning of negative growth shock.” Which is just a convoluted don’t-scare-the-bulls way of announcing over the flight intercom, “We’re entering a shockingly steep dive, so bury your heads in your pillows.” Hartnet lays it out like this:
Rates shock: Fed is desperately behind-the-curve [right where I said they’d be] but now set to hike aggressively…. the carnage below surface of credit and equity indices has been savage…46% of all Nasdaq companies were >50% below 52-week highs one week ago.…
Volatility shock :… the risk of volatility, disorderly capital flows, credit events is very high especially given policy divergences emerging. [In other words, turbulence immediately below, as if the dive wasn’t bad enough.]
…Debt shock … US interest rate servicing jumps [to] … a sum larger than the entire US debt back in 2005… [As a result,] US currency debasement fears will grow. [In other words, gravity is about to take us to terminal velocity.]
And that’s why I said all of last year this inflation will heat up until it lights the Fed’s back on fire, forcing the Fed’s hand to stop inflation and kill the stock market and send us into recession, or inflation will do all of that for us if the Fed fails to act. Ta da! Way to stick that landing, Powell! (“Yoke forward, straight into the ground, engines full throttle, plane saturated with jet fuel. Check!”)
Nice. The new Powell put: “Put her THERE. Stick the landing!”
Reprinted with author’s permission from The Great Recession Blog