Authored by James Rickards via DailyReckoning.com,
The stock market was down again yesterday, the exchanges beginning where they left off last week. But it’s the larger trend that’s really disconcerting.
Investors don’t need to be told about the stock market collapse in recent months. The Dow Jones Industrial Average is down over 20% since January. The S&P 500 is down 23% since January. And the Nasdaq Composite is down 32% since its all-time high last November.
Those falls are not as bad as the crashes in March 2020 during the pandemic or late 2008 during the global financial crisis, but those comparisons offer little comfort since they were among the worst in history.
The real problem for stock investors today is not that the crash is bad so far, but that it might just be getting started.
We may be looking at losses that more closely resemble the over-80% collapse of the Dow Jones from 1929–1932 or the 80% collapse of the Nasdaq in 2000–2001 in the wake of the dot-com bubble.
Different Causes, Same Outcome
The culprit this time will not be reckless mortgage lending, Chinese viruses or sock puppet spokespersons. The danger is the much higher interest rates needed to squash global inflation.
Rates have been going up since last spring, but inflation continues at very high levels. The question for analysts and investors is how high will rates have to go before inflation falls to levels deemed acceptable by central bankers.
Most observers have connected the interest rate hikes with the fight against inflation, but relatively few have realized the full implications. The real key to fighting inflation is to do so by increasing unemployment.
Fed Chair Jay Powell had a lot to say at a press conference following last Wednesday’s decision to raise interest rates another 75 basis points (the Fed’s third consecutive 75-basis-point increase).
Job One
Powell began by emphasizing that stopping inflation was Job One. He said, “Without price stability the economy does not work for anyone.” He noted that “Growth in consumer spending has slowed.”
His key phrase was “The labor market has remained extremely tight… Job openings are incredibly high… They need… to come down.” That’s Powell’s way of saying higher unemployment is the key to lower inflation.
Powell also said, “We think that we’ll need to bring our funds rate to a restrictive level and to keep it there for some time.” Restrictive level means a level that will cause inflation to drop toward the desired target over time.
When asked when restrictive policy levels will be reached, Powell said “There’s a ways to go.” To emphasize the point, Powell also said, “We’re committed to getting to a restrictive level… and getting there pretty quickly.”
The Endgame
What is the Fed’s target exactly?
Powell said the target was “to bring inflation down to 2%,” the Fed’s desired rate. When asked about the 2% inflation target, Powell said “We can’t fail to do that.” He went on to say, “We have got to get inflation behind us. I wish there were a painless way to do that but there isn’t.”
You get the point.
Rates will have to go to 4.75% (from the current level of 3.0%) in the hope that inflation (as measured by core PCE year over year, the Fed’s favorite gauge) drops from 4.6% to 3.5%.
At that point, real rates will be over 1.0% and the Fed will wait as long as a year for inflation to drop from 3.5% to the Fed’s target of 2.0%.
The real takeaway here is that Powell is dead serious about hitting a 2% inflation target. It seems he’ll raise rates as long as it takes to get there. He’s in a hurry to do so. And he was completely candid about the fact that there would be economic pain in the process.
Unfortunately, the cost will be a severe recession and a rise of unemployment to 5% or higher with millions of job losses, massive business failures, billions of dollars in bad debts and a continued crash in stock prices.
Will Powell Back Down?
This suggests some critically important questions for markets. Will Powell actually have the stomach to force rates up to 4.75%, about where they need to go to slow inflation?
Based on his remarks, the answer is yes. But we’ll have to wait and see.
The Fed was raising rates and reducing its balance sheet when on Dec. 24, 2018, the stock market tanked and proceeded to fall 20% in 2½ months. Powell panicked and pivoted again to monetary easing. Maybe he’ll do it again.
But there’s an important difference between then and now. There was no inflation to speak of in 2018. The Fed could therefore afford to pivot to easing without any real concern about inflation.
That’s obviously not the case in late 2022. Inflation is the Fed’s biggest concern right now, and Powell is making it clear that he’s serious about getting control of it, even if it results in a lot of economic and financial pain.
All Pain, No Gain
The problem, which I’ve addressed many times, is that the Fed has misdiagnosed the nature of today’s inflation.
The Fed is trying to crush inflation by reducing demand in the economy. They’re focusing on “demand pull” inflation where consumers are buying in anticipation of even higher inflation to come.
But the inflation we’re seeing is called “cost push” inflation. This comes from the supply side, not the demand side. It comes from global supply chain disruptions and the war in Ukraine.
Since the Fed has misdiagnosed the disease, they are applying the wrong medicine. Tight money won’t solve a supply shock. Higher prices will continue. But tight money will hurt consumers, increase savings and raise mortgage interest rates, which hurts housing among other things.
So the question is how much damage will Powell’s quest do to the economy and markets? That’s the biggest issue for investors. The answer is that Powell will do far more damage than he expects.
History shows that the Fed will overshoot. There won’t be any “soft landing.”
That damage may help Powell get to his inflation target. But it will increase unemployment and destroy stock markets along the way.
That’s if all goes according to plan. The actual scenario could be worse. Market investors are not ready for this.
But you should be.
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Is the economy reeling from cost-push inflation? Yep. But in the last two years, hasn’t the government printed 45% of all the dollars ever printed? Didn’t the Fed spend trillions on Quantitate Easing over the course of the last decade? I agree there will be no soft landing, but the problem is much more complex than Mr. Richards would have us believe.
When words have definitions that change depending on who’s using them and why and on what day of the week, then there can be no useful communication.
On inflation, there seem to be two camps: one that believes that inflation is monetary inflation and one that believes that inflation is an increase in consumer prices regardless of the reason.
The first camp believes inflation is an increase in the money supply that leads to higher prices by devaluation of each unit of currency; and, that there are other causes of price fluctuations which are not properly called “inflation”.
The second camp believes that the price finding mechanism of supply and demand is inflation, that shortages are inflation, that cost increases via regulation are inflation, that surplusses are deflation, that new technologies or substitute products are inflation, that any fluctuation in price is either inflation or deflation and that this is a perfectly useful definition of the word. They also believe that the price of, say, a Honda Accord (new) is the same today as it was in the year 2000; that increases in food or energy prices are not inflation; and that any of the above definitions of inflation may apply on Monday and be dismissed as “not inflation” on Tuesday depending upon whether it suits them. By this logic, if you quit your job and therefore do not have enough money to support yourself, you could legitimately claim that you can’t support yourself because … inflation.
Rickards clearly falls in the second camp, along with the Fed, the federal government, and the MSM.
Try 80%, this hole is way deeper than we realize.
To answer the question in the headline:
Usually zero tended to be the lower limit.
But I wouldn’t completely rule out that they start marking stocks at negative values – just like negative interest rates.
I will take all of the market if they are willing to pay me for it. To go.
Been out of the market since the Kenyan’s re-election. Losses to inflation are just as serious as those in the market and the destroyers have engineered that outcome.
I have 24% of my savings at risk. I too changed to that percent near the end of the Kenyan’s 2nd term. Yes, the at risk part dropped in value over the last 4 quarters.
One might go on and on about all the various “solutions” the paid liars and Ivory Tower Ivy League shitheads pedal.
Analysis is difficult as decreed rates and prices not “discovered” by the market do not follow any classic pattern.
Simply stated, we are suffering the effects of an illegitimate regime doing really stupid things.
Or the regime is doing really evil things…
I’ve been a fan of Rickards for a decade or so in fact, I posted my book review of his last book ‘Aftermath’ here. But lately, he’s pissing me off. He has a new investment program he’s pushing like a carnival barker. It’s the Agora hype where he gives a video presentation that goes on and on and there’s no way to fast forward to see what his fees are. Now I get emails from him daily spewing the same pitch. He is likely right in his projections only after getting screwed in a similar ruse by David Stockman I’m done paying for bad advice. I’ll win or lose on my own going forward and, for what it’s worth I think Rickards is correct. The economy is screwed.
Agora, or more specifically Davidson and Rees-Mogg are really unusual guys. They really know their shit and the stuff they hook you with and books etc. are accurate and the forecasting is superb. That said, they are grifters at the end of the day. They tell you stuff that’s true while picking your pocket.
Their research is horrible. Horrible. They are worse than grifters.
Stockman backs up his opinions with charts and data; what I discovered, he is as wrong as a broken clock. Some day he will be right, even he does not know when.
The daily market action is similar to always except now it’s sell high and buy low (while the sellers are also buying from those who sell low), then pump and dump, rinse and repeat. They don’t actually care about price but making money, and they do, if they have enough to control the market which they do. This 3600 level on the S+P is just below and is major technical support, If they hit it today and bounce. Otherwise, that down trend line goes a little lower every day. I’m giving up on stocks assuming a longer bear and am buying treasuries a little at a time and will be happy with all in at 4.5% or more laddered 6mo,1yr,2y,3yr when they get there in the next month or so. No pain, small gain.
The Supply of everything is falling causing Inflation so TPTB are taking away the Punch Bowl of money from Consumers to fight the Inflation; what could go wrong? Ask any 5th Grader: Millions of Joe Blows need a new Durable whatever but the price is too high now, so he needs to borrow some money, but that price is too high, so he says screw it. If Powell isn’t a quick enough nimble genius to catch the falling knife (he isn’t), he starts a retail and jobs crash and Depression. No problem; FJB and the democrats have the solution all ready to go : the godless NWO CBDC and Forever Communist Tyranny. Vote the democrats out 8Nov2022 like your life depends on it.
They are not going to announce a CBDC until they decide which party will be in control. They could use either, but it will probably be “bipartisan”. Whenever Americans get screwed, it is usually bipartisan.
All the way .
If we are lucky.
There are 2 sides of excess borrowing binges, one is the borrowing itself, and the other is the inflation of asset values used as collateral for that borrowing.
At the end of any bubble, we get assclown stupid asset valuations, which in turn, allow for the borrowing on those valuations much of which will not repaid.
In between the stupid asset valuation phase, and the I have to sell at whatever the market will pay phase, we have the denial stage, that is where we are now. Both the write down of asset values, and the default of debt are money destruction. As asset values drop, the chances that the debt owed on that asset will be paid decreases. Borrowers are reluctant to admit the asset devaluation, as is the lender, because both see that the realization of that devaluation means the loss of real money through money destruction.
Of course eventually, the devaluation must be admitted and loss taken, but that action then works to lower the overall market, and push a downward spiral of devaluation and default across the entire asset class.
Now multiply that phenomena by all the asset classes effected, and you begin to see the scope of the problem.
Now add to that the fact that us lowly workers ourselves are part of the overvalued asset class, and how much borrowing is perpetrated upon our productivity, and ability to pay loans and taxes with our paychecks. But now that pool of human assets is quitting their jobs at record numbers, and many who do continue to show up for a paycheck are doing less and less (soft quitting) driving productivity into the toilet.
And yet, we still have the economic religious zealots who having never seen everything go to hell, believe that somehow the Fed will jump in, print money and return everything to the normal of 2019. They are in for very educational experience.
Thank you Jim for a long, nicely done way of saying what could have been said in one sentence. Everything they touch turns to shiff.
Inflation expectations have just about taken a life of their own. Wage push pressures are coming to the fore now. If people can’t demand and receive higher pay many are just leaving the labor market. Many business will fail because they can’t meet the wage pressure expectations. This will end only when the safety nets are exhausted and the fat of the land has been consumed. Then, honest people (if any) will work for any wage–most will simply turn to theft. Human nature 101.
My stock investments are flat for the year sitting at $0.
Mine are up %400 this year and currently sitting at $0. So mine are doing way better than yours, follow me for some excellent financial advice.
I can even sell you my book for $29.95
But for a limited time only, then I have to take it back to the library…
Clearly you are financial guru. I will have to buy your book to catch up.
Ha!
You both are the only two financial advisors I will follow.
And I have made a lot of MACRO money with stocks (always getting out early – taking profit – and getting back in late – avoiding the risk and the Mooing Herd) until I got old and decided I wanted to sleep at night…and just stayed out.
Please explain how firing people is going to make the fed stop printing money, which is the real cause of the inflation.
“History shows that the Fed will overshoot. There won’t be any “soft landing.”. That is all you need to know, right thar.
Market investors are not ready?
Who’s a ” market investor”?
It’s all bots trading up and down all week long.
The Feds not raising rates to corral inflation anyway. We might as well be talking covid diagnosed with a pcr test here.
Here’s a thought..Don’t buy. Don’t sell. RUN!
Obviously ZOG just blew up the NS gas pipelines 1 & 2 which is an act of war against Russia. Now Europe cannot negotiate Russian gas whatsoever; Europe will freeze and crash, turn against US, maybe start protesting the USA, join the BRICS et all for something like the 1972 Embargo, dump the dollar, blow up the Alaska pipeline, and other pipelines, etc. Russia’s gloves will come off in Ukraine and that Donbass Salient will soon be sealed off trapping thousands of troops (some are NATO ). The stock market will probably crash like a civilian 747 hit with a Navy missile. Nov 2022 didn’t come soon enough. Americans should finally realize that Ukraine is a Vietnam War starting in Europe and hit the street corners waving signs: End the War, Elect Republicans, Impeachment Biden, Investigate Pipeline Sabotage, investigate Big Pharma, investigate food & fuel Sabotages, Investigate the FBI, Investigate Vote Fraud, Investigate Hunter Biden, Investigate Hillary, Outlaw Censorship, Outlaw Criminals not 2nd Amend, etc. The warmongers behind FJB are even worse than the warmongers that were behind LBJ.
Blah. Blah. Blah. All speculation by peddlers of Doom & precious metals. Last I checked gold isn’t $3000 or even $2000 and is actually down for the year. The dollar is the least worst currency and thanks to Biden’s fuckery nobody in Europe wants the euro or pound, making the dollar best game in town.
Early in the year when oil was $110+ I said we will see $60’s this year. Again the fuckery is keeping prices higher than they should be but there is still a 50/50 chance.
S&P 500 is going to bottom somewhere around 3400. I have started nibbling a bit and will buy heavier in 3500’s, dollar cost averaging on the way down. You can view this as End of the World or buying on the cheap. The people writing Doom Porn appreciate your fear and they make money on it.
If S&P crashes we have bigger problems to worry about. My household has zero debt, full freezers, and a close group of well armed local friends. We’ll be just fine either way.