The majority of financial media is in need of two paddles and a shock to their chests as the “bull market forever” and end of business cycle themes that has been ongoing for months now was shot out of the sky by Jay Powell and the Fed.
Some of the irrational exuberance was on full display in the financial and FinTwit media over the last four weeks:
Sure Mary, sure.
The bond market has thoughts.
Canada, Germany, China, Japan, South Korea, France, Brazil, and a bunch of emerging market nations would like to offer some opinions on this.
Meanwhile in the United States, the Chairman of the Federal Reserve Jay Powell decided not only to kill the Santa Claus rally but blow his damned sleigh clean out of the sky.
Here is the full FOMC Statement from the Federal Reserve today:
December 18, 2024
Federal Reserve issues FOMC statement
Recent indicators suggest that economic activity has continued to expand at a solid pace. Since earlier in the year, labor market conditions have generally eased, and the unemployment rate has moved up but remains low. Inflation has made progress toward the Committee’s 2 percent objective but remains somewhat elevated.
The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. The Committee judges that the risks to achieving its employment and inflation goals are roughly in balance. The economic outlook is uncertain, and the Committee is attentive to the risks to both sides of its dual mandate.
In support of its goals, the Committee decided to lower the target range for the federal funds rate by 1/4 percentage point to 4-1/4 to 4-1/2 percent. In considering the extent and timing of additional adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks. The Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage‑backed securities. The Committee is strongly committed to supporting maximum employment and returning inflation to its 2 percent objective.
In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals. The Committee’s assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments.
The Fed basically attempted to sell this as a “hawkish” cut as warned in these pages earlier this morning. The reality is that the Fed pretty much copied the Volcker 1980 playbook when the FOMC of that era engaged in three cuts from May through July claiming that inflation was moderating (see bold above) although this Fed’s wording is somewhat muddled to claim victory over something when inflation is nowhere near the target rate.
What happened to the Dow Jones Industrial Average after the Volcker cuts is history, so to say:
With only a 15% decline in equities, one might declare success, right?
Wrong. The recession of that era was very deep, extremely painful for the middle and lower class, and took well into 1983 for a sustainable recovery to occur. Did the Fed action today trigger this risk?
Probably not, as in all likelihood the economy or at least a large majority of the people in the US economy, have been experiencing a recession from the spring of this year.
The problem that Volcker endured was a level of intolerable embedded inflation which after the rate cuts of 1980 was accelerating higher before collapsing under 20% Fed Funds Rates in December of that year.
In context, today’s rate cut and threat to stand pat could be quite bullish for equities in the short term but very bearish for the long end of the yield curve. The first hints of a problem for yields happened when the dis-inversion of the 3 month and 10 year US Treasuries finally started to steepen at light speed tonight:
If one looks at the now flailing residential real estate industry, the impacts of mildly higher rates on CRE, and the real employment situation starting to deteriorate rapidly before the new President has even been sworn in, odds are the recession began as these pages have been preaching some time in May or June of this year. The major problems across the manufacturing and high tech sector have been noticed finally, but now a major financial industry problem may reveal its ugly truth starting in the first quarter of 2025 as rates move higher.
The major difference this time versus 1980 is that the current Federal Reserve Chair working with the new administration might well tolerate a period of stagflation to unwind the excesses of the post-Covid economic era. If that validates, the bond market will be telegraphing this solution early and often in 2025 with the political elites attempting to add to the inflationary problem via more fiscal insanity to offset stagnant to contracting economic activity.
Unfortunately for stock market bulls, the smart money always wins in the end. As the US 10 year yield pushes substantially above 5%, the accompanying equity correction will be fast, violent, and without precedent for many of the virgin options and crypto traders who lack experience trading during unpredictable cyclical bear markets. For us old salts, those of us who have been around since the late 1970’s, we say welcome to the party pal.
This is not going to end well for the consumer in early 2025 and the media has ill prepared the citizenry for the return of the business cycle.
Lastly, I feel terrible for Santa. He never stood a prayer against Jay Powell and his Bond Spread Sidewinder missiles fired off his FOMC-15.
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