Its Payback Time

There is no free lunch with money printing.  The MMT supporters had their time to shine in 2020 while crude went negative amidst the biggest Fed QE + Rona stimmy fest double barrel bazooka ever.  They thought all the money spew wouldn't result in inflation.  They felt invincible.  They were right for a few months.  Gradually, and then suddenly, they've been completely wrong.  Team Transitory along with their MMT cousins have quietly slinked off in the corner, never mentioning that phrase again, for fear of ridicule. 

Inflation is a monetary phenomena.  Its not about temporary blips like supply chain problems or war, its about the supply of money chasing a fixed amount of goods and services. I am sure Powell and all the economists would disagree with me, but they are paid whether they are right or wrong, comfy in their ivory towers.  When I'm wrong, I feel the pain right away in the form of losses.  When they're wrong, they find something convenient to blame (supply chains, Putin, China lockdowns, etc.) or nonchalantly sweep it under the rug. 

People tend to overcomplicate things, or just parrot the media, who blame everything on supply chains for the inflation.  It all comes down to the money.  The US has been the most aggressive nation for both fiscal and monetary stimulus since 2020.  They doused everything with a firehose of liquidity and free money, and thought of themselves as heroes.  And they've ended up with the highest inflation among all the  developed nations.  Powell was revered as a great central banker who saved the financial world with his QE bazooka.  All he did was kick off the biggest bubble in US financial market history, even worse than Greenspan, and waited 2 years to start undoing what he started.  Even the ever late to tighten Greenspan took back the fall 1998 rate cuts with rate hikes 12 months later.  

Mr. Transitory, Jerome Powell, has managed to be about as bad as Bazooka Ben Bernanke, the Time Man of the Year, a guy who delayed normalization and rate hikes to the next chairman, so the shit didn't hit the fan on his watch.  Doves are celebrated.  Hawks are criticized.  That's the world that central bankers live in, and they are incentivized to print at the slightest sign of economic weakness.  Its the easy way out.  And they've abused the printing press resulting in what will be a long period of inflation, that will confound the deflationistas, who are still stuck in the 1980 to 2020 mindset of falling yields, regardless of the fundamentals.

This time, unlike the 1980-2019 time period, the budget deficit is now a significant % of GDP, which is inflationary, especially when the Fed is so willing to provide the funding for all that pork.  You need a proportional increase in production to compensate for the increase in money, otherwise, prices will rise.  With the dollar as the reserve currency, that exorbitant privilege has kept inflation lower than it would have been otherwise, but there are limits.  Eventually, foreign nations will see that the US government is doing its best to debase the dollar, and will be much less willing to finance their debt at low interest rates, leaving the Fed to be the main buyer.  That eventually erodes trust in the US dollar, which looks like the king now, but it looked like that in 2000 as well.  And by 2008, it looked like the euro had overtaken it as the EURUSD rate went from parity to 1.58. 

Right now, there is no concern about the dollar because of its relative strength vs. the euro, yen, and most foreign currencies.  But watch what happens when Powell makes his dovish pivot, which is a matter of if, not when.  That's when you will see the confidence start to disappear.  Its not while they are tightening, because the market over projects the rate hiking path and overrate the Fed's inflation fighting credibility.  Powell has no credibility on inflation.  He's folded quickly to pressure before.  He's been too late to hike.  He's all but told you that he won't try to shock the market to get ahead of the inflation curve.  And the bond market initially liked, but then thought about it, and didn't like the lack of backbone and inflation fighting that Powell communicated.  

The bond market is starting to see the writing on the wall, that inflation will remain sticky, and would prefer the Fed rip off the band-aid, instead of pulling it off slowly and methodically, trying to make it hurt as little as possible.  In other words, Powell is a pansy.  He will placate the market at the first signs of real stress, and we're much closer to that point than people realize.  It would not surprise me if he made a pivot to being data dependent once he gets the Fed funds rate up to 2.0%.  Being data dependent = watching the S&P 500.  If the SPX stabilizes or goes up, he could sneak in an extra 25 bps, if not, no rate hike.  Most likely scenario, after he gets to 2.0%, he will freeze if the stock market follows the post bubble pattern of Nikkei 1990, Shanghai 2007, Nasdaq 2000.  Freezing rate hikes at 2.0% with the economy heading south and inflation staying high = guarantee stagflation.  And my bet is that Powell will choose a guarantee slow burn stagflation to a fast burning painful deep recession with inflation back towards 2%.  

Just a weak weak market.  Another brutal selloff on Monday. It looks like it wants to test 3950 to see if there are buyers there before heading north.  May do a little dip buying if we see 3950-3970 levels Tuesday, for a short term trade.  I see a potential strong bounce this week after the CPI numbers come out and the 10/30 year auctions are behind us, but I don't expect a significant rally until you get to deeper value levels.  Ultimately I think we have to get down to the 3600-3700 level before tempting the value buyers and getting a real sustained counter trend move.  

I have little confidence in buying the dips in this market.  I have all the confidence in the world in shorting the rips.  This feels just like a repeat of 2000, with the same levels of heavy equity positioning.  That bear market lasted over 2 years.  We're only 4 months into this bear market.  We've got a long way to go.