Financially, the US burned like the southwest did in a heat dome last week, as stocks, bonds, cryptos went up in flames, but the worst thing that happened was faith in the Fed grew weary. Even the Fed’s most faithful started to doubt if the Fed is up to the task ahead of it.
Jamie Dimon, CEO of JPMorgan Chase, set the week off with a fitting sour note when it was reported across the financial news, he had updated his weather report for the economy:
I said there were storm clouds. But I’m going to change it. It’s a hurricane.Right now it’s kind of sunny, things are doing fine, and everyone thinks the Fed can handle it. That hurricane is right out there down the road coming our way. We don’t know if it’s a minor one or Superstorm Sandy. You better brace yourself.
Dimon indicated his bank was battening down the hatches for some real rough weather. Later in the week Alasdair Macleod, following Dimon’s motif, explained why Dimon sees a hurricane brewing on the near horizon:
G-SIBs [global systemically important banks] have accumulated excessive exposure to financial assets, both on-balance sheet and as loan collateral. With vicious bear markets now evident and further interest rate rises guaranteed by falling purchasing powers for currencies, the one thing regulators have not allowed for is now happening: like a deepening meteorological low, bank credit is contracting into a perfect storm.
Jamie Dimon’s recent warning that his bank (JPMorgan Chase) faces hurricane conditions confirms the timing. Central banks, bankrupt in all but name, will be tasked with rescuing entire commercial banking networks, bankrupted by a collapse in bank credit….
Financial assets are in a bear market, driven by persistent rises in producer inputs and consumer prices, which in turn are pushing interest rates and bond yields higher. So far, investors have been reluctant to lose trust in their central banks which have been instrumental in supporting financial markets. But this is now being tested, more so in the summer months as global food shortages develop.
We have increasing evidence that bank credit is either contracting or on the verge of doing so….
Macleod explained that the core problem, even for central banks, is the ongoing bond-market wipeout where, if bonds are priced to market value, many banks — even central banks — are deep in the red on their balance sheets:
The Fed recently admitted that unrealised losses on the bonds on the asset side of its balance sheet stood at $330bn at end-March, which wipes out its balance sheet equity of $50bn more than six times over. Since then, bond yields have risen a further 1%, increasing the deficit to closer to $500bn.
While Dimon’s proclamation set the tone for the week, CNBC bookended it by describing the week, once markets were closed, as follows:
Wall Street and the Federal Reserve appeared to enter a new reality this week, and the result for investors was big losses with no obvious end point in sight. The S&P 500 posted its 10th down week in the last 11, and is now well into a bear market. On Thursday, all 11 of its sectors closed more than 10% below their recent highs. The Dow Jones Industrial Average fell below 30,000 for the first time since January 2021 this past week.
They also noted a point I am prone to keep reminding people of — there is no Fed save coming on this one. Father Fed won’t be putting a bottom in for the market’s fall. I have read frequently, even on popular alternative financial news websites, that Powell will soon be capitulating with the famous Powell Put, but my own response to that has been, “Not on your life. Not until the economy already lies in the ruins of recession and recession is bringing inflation back down.”
Of course, by then, the dirty job is done. The bull will have had its guts strewn all over the field by the bear, and the Everything Bubble will be foaming its way across the field to wash away the bull’s blood with scrubbing bubbles.
As Mohamed El-Erian explained:
Inflation has become so extreme it is not just forcing the Fed to tighten more aggressively than it has in decades, but it is forcing several central banks, including the Swiss National Bank, to tighten aggressively at the same time in somewhat of a currency war to maintain their positions relative to the Fed. With CBs jockeying to align with the Fed’s tightening around the world, Bank of America equity strategist Ajay Singh Kapur joined El-Erian by warning that it is time for investors to stop fighting the Fed and its cohorts in global financial instability and give up the buy-the-dip mentality:
In a bear market, heroism is punished. Valor is unnecessary, and cowardice is called for in portfolio construction — that is the way to preserve capital and live to fight another day
Stocks were far from being the only bloodbath in the streets last week.
Bitcoin dropped more than 30% in a week amid reports about blowups of crypto-focused trading firms. Treasury yields, which move opposite of bond prices, have spiked.
With all of the week’s financial destruction, you might think financial analysts are begging the Fed to stop. However, not all analysts want to see the Fed’s FOMC rush back in to save the market. They prefer to take the destruction and see the Fed finish its fight against inflation because inflation erodes everyone’s wealth, and markets have been running negative all year, even before the Fed did any fighting … when all it was doing was a lot of big talk:
“These people need to fight inflation as fast as possible and as hard as possible. And the market has consistently been behind the curve on trying to understand how aggressive this Fed was going to be,” said Andrew Smith, chief investment strategist at Delos Capital Advisors.
Hopefully, you are among those who have accepted the fact that the Fed is not going to ride in like the Lone Ranger and save the day and that this time is different than anytime most investors alive today have experienced due to searing inflation. However, if you’re too young to even know who the Lone Ranger is, then you are also too young to know what a monster inflation is. So, please do yourself a big favor and get the message completely now, albeit halfway down in the battle: A Fed save is not going to happen — not until it is way too late to matter. The Fed will arrive like the cavalry when everyone on the battlefield is either dead or writhing in blood because it has to keep fighting inflation, which ripping into everyone one the battlefield with its teeth and claws. So, the Fed can’t rush in with its usual medicine right now even as it is killing investors under friendly fire. It’s a mess.
The Fed will fight until it sees inflation retreating just as Powell has said. He cannot run from this battle because everyone expects him to fight it, whether he can do much about it or not. After two decades in which the world has watched the Fed’s various forms of loose policy pour money into markets and create bubbles that many warned about, no one will forgive him if he cannot wrestle inflation back to the ground as it destroys their retirement nest eggs and creates significant pain in their current costs of living. If Father Powell fails, the Federal Reserve’s sole proprietary product will become decreasingly significant.
He will never get interest high enough to kill inflation by pushing it down with interest that is higher than the inflation rate because, long before he gets that far, the Everything Bubble will have broken over the entire planet, and all nations will be deep in recession, and the crushing global economic recession will be doing its own work of destroying demand by destroying purchasing power until the global economy’s natural corrective forces do the job for him.
Faith in the Fed is almost dead
Powell and his cadre of banksters are already losing the faith of the masses, and faith is really the only thing they have to sell, as their money is backed by nothing other than the Fed’s good faith and credit. So, lose faith, and the Fed loses everything, including the power that will be stripped away from it if its fiat currency continues to rapidly devalue, robbing all people who bank in dollars of their wealth.
The Federal Reserve’s missteps in waiting too long to tackle the greatest run-up in prices in four decades has shaken trust across markets and the American public that it is up to the task of curbing inflation.
That, of course, is why Powell had to pound the 0.75% button down with his fist and speak boldly about doing all it takes to beat inflation back down … while reassuring the world with vacuous words that the US economy is fundamentally strong. The US economy has rarely looked worse in numerous ways that I’ll lay out in my next article, so it is risibly insulting when the Fed says such stuff.
Before assuming bankers like Powell actually know anything about the economy, remember that the same Dimon that now yells hurricane warnings over our shoulders was not that long ago claiming to my great disagreement,
This is the most prosperous economy the world has ever seen. It’s going to be a very prosperous economy for the next 100 years.
Less than three months after he made that obvious-nonsense forecast for the next hundred years, the economy plunged into the Covidcrisis, which was easily the sharpest drop into a bear market and recession since the Great Depression, causing damage we are still dealing with all over the world, including the US no less than anywhere. Obviously, he had been schooled by Queen of the Treasury Janet Yellen in the Buzz-Lightyear school of “no financial crises for the rest of my life and beyond!” He made a similarly absurd proclamation at the start of this year when the present recession was starting to settle in.
Before the Fed’s big meeting in the middle of this bloody week, MSN noted the fears that gripped the market ahead of the meeting and that would tear like claws through markets after the meeting:
Financial market volatility and losses deepened on Tuesday, fueled by fears that the Fed continues to misjudge inflation and will come down too hard on the economy, prompting a recession.
Better to fear what is already here late, I guess, than not at all. Not at all surprisingly, the Atlanta Fed came out hours later with its GDPNow forecast revised down for this quarter to 0.0% GDP growth: