Stock market investors, hungry for more pork, are demanding Fed Chair, Jerome Powell, land on their table on a silver platter with an apple in his mouth at this week’s congressional hearings. Will he deliver? Powell has a thin red line to talk, or this overFed market that he and is cronies have nurtured dies this week from its own morbid obesity.
A tough trend to break
Receiving delivery of the Powell pork is the only way the market will punch through the enduring ceiling shown in the chart below. If Powell walks a tight line perfectly in congress this week, the market will impatiently await his delivery of pork bellies at the end of the month. If he looks like he’s trying to create wiggle room to walk away from rate cuts that the market has perceived as a promise, the wiggly little pig is going to get his bacon burned along with his porcine friends on Wall Street.
As you can see below, the upwardly soaring trend of the Trump Rally in late 2016 and all of 2017 lost all of it potency on January, 2018, when I said it would because Powell’s Great Recovery Rewind doubled down on the Fed’s rate of monetary tightening. You can also easily see how the market really fell to pieces when tightening got up to full speed at the end of September, 2018, at exactly the moment Powell announced the Fed’s rewind would continue at full speed on autopilot for the foreseeable future.
Apparently the Fed could not foresee very far, for the Fed couldn’t rush fast enough to abort that plan, at least in word, by that December. As you can also easily see, the market made a burst for recovery the second the Fed announced it would change course. Yet, the market still failed to recover back to its new sloped ceiling because the Fed didn’t really change course. That was all somewhat of a head fake, as the Fed stopped raising interest but continued tightening money supply ever since. Hence, the failed attempt once already this year to recover to the ever-so-slight upward trend line and now another run at the same, which is, again, failing.
The only way out of this succession of ugly bull traps is for Priestly Powell and his Fed monks to do everything they can to reinflate asset bubbles as quickly as they can. Unfortunately, they still plan to continue tightening at half speed through September with Powell as Trump’s whipping boy the entire distance. It would be highly peculiar for them to lower interest rates at the same time they are continuing with their monetary tightening regime. Still, Powell is finding himself boxed in tight and may do anything. That tight spot couldn’t be happening to a nicer guy nor a more deserving organization. So, I feel no sympathy for any of them.
Good luck with the next couple of weeks, Jerome.
Ever-increasing irrational exuberance
Even if the Fed blows all the hot air its board members can muster to reinflate the bubble just back to that pathetic upward trend line, how far can you blow past that before the bubble pops in your face because its sides are getting so thin already? I maintain they can no more blow the bubble up much further than they can let the air out slowly without the bubble getting away from them now that stocks are all-in on betting for a Powell put at the end of the month. If they punch through that thin red line, it will end quickly as bubble splat all over their faces and everyone else’s.
Nevertheless, it’s fork it over or be eaten as far as Powell’s ecclesiastical zealots who worship at the Fed Eccles Temple are concerned. Fork over the pork, Powell, or they’ll eat you alive while Trump thumps your sorry little behind for an economy that is failing everywhere on his and your watch. I won’t feel sorry for either of you if you both go down for this together, each deflecting blame to the other.
Notice in the next graph how the last two rallies of the market have even tried to rise faster than the original Trump Rally. The market keeps trying to beat its pervious level of exuberance, even as market gurus widely claim, “No euphoria to be seen here, Folks.” No matter how steep the enthusiasm ramps up in order to try burst through the ceiling, the experts claim “no euphoria visible yet, Folks. Each attempt runs faster and hotter at that ceiling and then blows apart at the top.
Clearly, the market needs more of Powell’s providence since that is what ended, destroying the market’s ability to rise past this point in January, 2018. There is only so far you can TALK something up each time with hot air. No matter how steeply the market climbs, it can’t punch through because economic stats keep falling all around it all year due to the Fed sucking away the market’s and the economy’s monetary fuel. At the same time, the market and the economy have faced an increasing downdraft from the Trump’s Tariff Wars.
The Trump victory 737 that the market first rallied in has Maxed out. So, to make one last run at its ceiling, the market will have to do something it has never done before and become so irrational and euphoric that it attempts to go straight up like a rocket against a rapidly falling economy, not a slowly recovering economy. They say the nose of a 737 likes to go up on its own but that when it quickly stalls and falls out of the air. So you want to bet that’s what happens if the market’s pilot, Priestly Powell, actually tries that stunt? I think both the economy and the stock market are now damned-if-he-does or damned-if-he-doesn’t.
The market’s reactions to Powell’s sermon this week will give us a feel, based on where we feel the reverberations, of how things might fall apart if no rate cut comes at the end of July. Be attentive to how this big bird feels, but know that Powell will be keenly attentive, too, and may change his course of action based on how the market responds to this talk.
A crash-landing is almost certain
Even if Powell lands on the table with the apple in his mouth so that he manages to push the fake stock market out of bounds, the economy is not going to follow. The stock market’s response to its peyote-packing priest at the Fed is immediate and often even premature (as seen by its current high where it is betting with the absolute conviction of solid reality by fully pricing in a rate cut that hasn’t materialized yet — so full of faith are the Fed faithful. The faithful are even betting on a Chinese trade resolution that appears as elusive as ether. So, the market’s response is beyond immediate. It’s premature.
However, the real-world economy’s response to Fed actions has about a six-month lag time. That means the actual economy (not to be confused with the stock market) is just now starting to reveal its response to December’s tightening, and it still has January, 2019, through September of 2019 to work through over many months ahead. That, in turn, means the divergence between the economy and the stock market is going to get more bizarre than anything we’ve ever seen if Powell delivers the dope to drive the market to new highs.
Which do you think will ultimately prevail then — the gravity of our deterioration economic situation (see “Ten Big Steps down the Road to Recession“) or sniffing jet fuel out of the Fed’s exhaust?
While I have not been much of a reader of Charles Hugh Smith, I do like how he’s summarized our present economic plight:
Put another way: central banks have created a speculative monster. The public cover for central bank easing has always been to “stimulate growth” in the real economy, but the real effect has been to concentrate the newly issued currency and leverage (“money”) in the few hands that own most of the speculative (“risk on”) assets. This pool of new money has been augmented by cheap credit for global corporations, enabling management to buy back trillions of dollars of stock, thereby enriching stock holders and those collecting stock options as part of their management compensation.
Those reaping billions of dollars in asset gains will not tolerate any reduction in central bank largess. This is the monster the Federal Reserve and other central banks have created: a monster that wields tremendous political power due to its immense wealth and equally potent market power. Any extended sell-off panics the politicos, pundits and peons alike, as everyone has bought into the cargo-cult fiction that a soaring market somehow helps the 95% who own zero or trivial amounts of speculative assets….
As Lao Tzu observed, the way of the Tao is reversal, and a fever-pitch extreme of speculative euphoria makes an equally extreme decline inevitable as gargantuan asymmetries unwind…. Speculative extremes eventually reverse, regardless of the monster’s agonizing screams.
Call it a pig, as I have, or a monster, as Hugh Smith has, let’s just agree the Fed has created monster pig of a market right now, and this monster pig will become an enraged and squealing monster pig if the Fed doesn’t feed it … and quickly.
Of course, the Fed, which made hyuge promises about what quantitative easing would do to boost the economy by creating a wealth effect has also promised us that quantitative tightening (the reverse operation), on the other hand, will have no effect whatsoever. Where is the logic in that?
Whether Powell leaps to feed himself to the squealing monster or not this week, the monster market is going down. It’s already staggering once again this week because the real economy is threatening to bring it down. It deeply fears its own destruction in that environment if it doesn’t get another dose of Fed meds to carry it through.
In my view, it is just a question of whether the stock market dies this week because Powell doesn’t talk the talk well enough, dies at the end of the month because Powell doesn’t deliver the addicts their mandatory meds, or falls all apart later in the summer because the economy sucks it down in its undertow as the Fed’s tightening sucks fuel out of a rigged economy that has only been kept alive by the Fed’s artificial life support all along.
If I’m wrong on that, I might as well quit because the unsustainably of the Fed’s economic recovery once they stop life support has been my thesis throughout the writing of this blog. Of course, they are never going to stop life-support because they are learning they cannot; but I also always said they would learn this too late to save their recovery from their own wreckage. They’ll have so many things falling down by the time they realize they’ve gone too far (as I’m sure Powell is realizing now) that they’ll be buried in a disaster of their own making.
Good luck with all of that, too, Powell. Your endgame is nearly here because you never had one of your own that was capable of working. Quantitative tightening was always the noose around your neck.