Welcome to August ladies and gents.
I hope everyone had a great summer, even though Europe is now departing for their sweaty, stinky, non-air conditioned vacations, the United States is starting the back to school period and worse, the real money evaluating the state of the economy not just on a national, but international basis.
Now that the pleasantries are over with, I warn everyone now that with the incompetent leadership at the helm of America’s economy and political elites the odds of “the mistake”, be it on purpose or by accident, are higher than ever leading to a market crash of epic proportions.
To understand why I see the upcoming for months as the most turbulent upcoming months in modern history, let us refer to Fundstrat, aka, Tom Lee and his band of dancing bulls which appear on the primary Bubblevision channel more than Donald Trump did on Twitter.
The problem with Fundstrat, other than they have a buttload of garbage speculative crap to unload on the retail suckers, is that there are zero hints of disinflation. Not to mention using the “Volcker” comparison is a falsehood. By 1982, Paul Volcker had been tightening for almost three years and the impacts of Fed tightening did not start to slam into the greater economy until then.
By contrast, the first three moves by the Powell Fed are still six to nine months away from any direct impact on the economy and inflation has only paused due to seasonal events. If one looks at the primary lagging indicator, the Producer Price Index (PPI) then the honest evaluation is that the secondary wave of inflationary impacts on the consumer are not due to hit until October and November of this year:
Let’s just humor the CNBC crew and do an apples to apples comparison to the 1972-1982 inflationary cycle the US experienced:
The problem for the Fed now, as it was under Arthur Burns then, is that one can not “talk down” inflationary pressures. The PPI is the best future indicator of price inflation and nothing is indicating a reversal. In fact if anything, the paper price crash in commodities does not reflect any reality of what is happening to manufacturers on the ground and will boomerang on the economic predictions of tamer inflation into year end and the first half of 2023.
Thus why I see turbulence of incredible magnitude heading into what I term Wave 2 down of the equity markets heading into the remainder of the third and fourth quarter.
First, inflation might come in a tad weaker in August due to a short term decline in gasoline prices, but natural gas prices have yet to correct to historic norms and thus will keep the pressure on both the consumer and manufacturing due to higher electricity prices.
Secondly, there absolutely nothing to indicate that Quantitative Tightening of any consequence has begun with the Fed balance sheet so there is still a tremendous amount of cash sloshing around being used for insane purposes thus keeping financial conditions just loose enough for the irresponsible consumer to party on like Wayne and Garth.
Lastly, the equity bear market has yet to teach the go-go online trading retail speculator virgins a lesson. The volumes this past month have has as much conviction as the New York City Soros funded District Attorney. Low volume, meh A/D, and worse using “narratives” rather than actual large investor support to justify rallies in the stock flavor of the day only indicate that this was indeed a summer time bear market rally and the vengeance of the bear is going to hurt a lot of newbies.
In fact the bear market still looks like it has a way to go down if one studies the weekly charts:
To understand just how much capacity there is for even greater volatility, one only has to return to the end of the Great Financial Crisis and on to the onset of the great bull run to understand that markets can and will teach short term narrative based Bubblevision retail addicts a lesson:
The market has yet to even come close to capitulating to 2020, 2011, nor 2008 levels on a volume or percentage basis. The theory that this is just a baby bear in the face of inflationary pressures is laughable since at not point in modern history has the current crop of retail investors ever experienced 15%+ PPI and CPI along with Fed Funds increasing at a proportional rate.
Thus why I say in the chart above if the 1800ish level does not hold, we could easily see a coincident tightening of financial conditions, credit contraction, and equity investment collapse on par with the early 1930’s if the current political and economic leadership regime does not understand the impacts of their actions or lack thereof.
And all of this is based on no invasion of Taiwan by China or further expansion of conflicts around the globe hitting an already fragile raw materials marketplace. Think about the consequences economically on those events and the inability to maintain any sustainable supply chains, much less grow the US economy, and the crash only becomes greater, more long lasting, and severe.
Buckle up and put your tray in the upright position boys and girls as the next few months are going to be insane.
2023 is going to be worse.