There is this growing theory of thought being promoted on the Bubblevisions (financial television) that the Federal Reserve is done raising rates. It is promoted by permabulls and prayerful hedge fund managers who promote their book because an actual bear market now holds great risk for not just the markets as a whole, but their portfolios which are completely based on hopium.
For example, ever since Nvidia, a fine company I might add, went on a non-stop “artificial intelligence” boom with their chipsets, everyone said it’s a “must own” equity. Believe it or not, I’ve heard the same thing in the past. There is a company where everyone said “the equipment they manufacture will be the heart and soul of every aspect of the internet” and other such nonsense to that effect.
That was in 1999:
At this very moment, Nvidia is still in the “hopium” phase but yesterday’s price action and some indications of insider selling might have just marked the top when it kissed the $500 per share price level.
Bubbles are still being blown or attempted to be inflated all in the name of the myth of a permanent economic Utopia. Even yesterday to keep the overpriced real estate market alive, Zillow announced 1% down financing on homes. It’s almost as if 2005-2009 never happened and the Fed is blessing this type of behavior.
Thus Jay Powell’s eight minute speech last year might as well apply to this year but with even more stringent language. The “markets” are not taking his fight against inflation seriously. While there was progress in the inflation battle, the reality is that services and wage inflation are still rising at a substantially higher rate than the 2% PCE target. This is why the hopium cartel is pushing the idea that the new floor for inflation expectations should be 3% or maybe even 4%.
In other words, capitulation and acceptance that the market can not function without QE forever. The reality is that inflation only declined on the fringes due to short term fluctuations in commodity prices, just like it did in 1977 until early 1979. The Atlanta Federal Reserve Bank’s Sticky CPI research demonstrates that indeed, inflation appears to have become embedded at a higher level in the economy and must be brought under control.
Even with the higher Fed Funds Rate, the declines in M2 and slight increases in the velocity of M2 tend to reflect a lack of a major credit contraction.
Hence based on the chart above and the insane levels of fiscal spending injected by Washington, DC, the logical thing to do this morning would be for Jay Powell to simply reinforce the hawkish stance and continue to push for total containment of inflation as the Fed’s only target this year.
Unfortunately, the Federal Reserve has become an extremely sensitive political animal, subject to the whims of whichever party is in power at the moment. Hence I think instead of taking the Volcker approach of a hard line against a permanent embedded inflationary deterioration, Powell might well announce a pause or even prematurely declare “victory” over the monetary demons.
There is no good choice for Jay Powell in this morning’s speech. If he forces the economy and markets to take the necessary medicine to repair the damage done by America’s experiment with MMT and drunken Keynesian ideals, there will be bank failures, credit events, and even a severe recession if not a mini-depression.
But since 2024 is an election year, I fear the Fed will capitulate to the whims of political elites on both sides of the aisle.
Today will be one of those market events, as I warned about with the Fed earlier this week, that might go down in history as another blunder which will impact our nation far beyond Powell’s term as Fed charman.