Reality Keeps Pounding the Heads of Dull Investors

Photo by Daniel Lloyd Blunk-Fernández on Unsplash

Reality keeps hitting points home for the poor Dow and its beleaguered company of other indices. It dented the Dow pretty badly today. A trio of central banks have all underlined this week the fact that the battle will be long, and their will to stick it out with whatever they have to do with interest rates remains resolute.

Of course, had these same central banksters not been so blatantly delinquent in recognizing that their stimulus polices were running on far too long and their tightening beginning far too late, the problem would never have become as bad as it is:

The so-called "higher for longer" mantra is now the official stance of the U.S. Federal Reserve, European Central Bank and the Bank of England, as well as being echoed by monetary policy-makers from Oslo to Tapei.

For central bankers first chastised for being late to spot the post-pandemic surge in inflation and then cautioned for overdoing their response, the prize of returning the global economy to stable prices without recession is now within sight.

I disagree, of course, on the final statement by that writer.

It still seems overly optimistic compared to the following statement within the article by one of the central banksters who helped create this inflation mess:

"We will need to keep interest rates high enough for long enough to ensure that we get the job done," Bank of England Governor Andrew Bailey said on Thursday after policymakers narrowly decided to hold its main interest rate at 5.25%….

In Europe, ECB President Christine Lagarde was adamant last week that further hikes for the 20-country euro zone could not be ruled out. The central banks of Norway and Sweden both signalled on Thursday they could hike again, with even the Swiss National Bank holding out the prospect of further interest rate hikes despite inflation at a comfortable 1.6%.

Despite gradually cooling, inflation in most large economies remains well above the target 2% level which central bankers deem healthy. In August it stood at 3.7% in the United States and 5.2% in the euro zone.

The end is not within sight because the hardest part of the fight is the last part. That is the long slog to the bitter end. The low-hanging fruit all comes off easily. That is all the stuff that is not by its nature necessarily “sticky.” Naturally, the sticky stuff is a lot harder to knock down. So, you get a big drop at first and then a very slow fall as you keep working at the tougher stuff. Yet, we are back to rising! So, not even close to the end being in sight. We’re running the wrong way again.

Yet for all the tough rhetoric, investors remain skeptical that central banks will stay the course given doubts over the strength of the Chinese economy and geopolitical worries, from the Ukraine war to U.S.-Chinese rivalry.

Of course they do. Their brains have been running on fumes of hope throughout the duration of the Fed’s inflation fight. There is no reason to think their brains would start working now, and yet stocks took a dive today, so someone in the market must have started worrying that the battle may remain tough after all. Treasuries got the message, too, and climbed steeply to high yields last seen long ago.

The real crazy part is that, even if one of those things listed caused the economy to plunge hard enough for the Fed to relax rates sooner, that wouldn’t be good for stocks. The Fed would only make such a major turn if true calamity hit. (As it will because the Fed is going to tighten until it does. Just as the Fed wrongly believed inflation was transitory and waited far too long to start tightening, it wrongly believes it can navigate a soft landing and will tighten too long until something really big breaks and then another something big breaks, and the cascade begins.

"By this time next year, we anticipate that 21 out of the world's 30 major central banks will be cutting interest rates," Capital Economics wrote in a commentary entitled "A tipping point for global monetary policy".

They will only if the economy is destroyed by then — a not unlikely event — but that will mean a huge crash for stocks to come before the Fed changes direction. You don’t get to the Fed risking a rapid and high rise in inflation with more stimulus anytime soon — after all the fighting the Fed’s Foo Fighters have done and hardship they have caused — without a calamity that seriously frightens the Fed into throwing in the towel on inflation, or that is so severe that the economic collapse, itself, collapses inflation.

Don’t assume, however, that the collapse of inflation with the collapse of the economy are by any means inevitably joined at the hip. The worst recessions the world has seen have come with inflation rapidly turning to hyperinflation when banks tried to solve the problem by pumping lots of new money into it.

That solution has always worked in the US without hyperinflation; but you get to a point where money is not going to do the lifting you are used to experiencing, so all you are doing at that point is devaluing your money while spinning your wheels in the mud. We could easily get into a situation where more money doesn’t solve the problem, and the Fed will certainly be slow to figure that out.

That would happen if my biggest warning for this year (one I did not make as a prediction, but just as a warning of the worst-case scenario) comes about. That would be if the Fed gets to where its tightening is exacerbating shortages and supply-chain problems that already exist, and those additional shortages create the kind of scarcity that actually drives up prices all the more as the Fed tightens more, crushing production all the more; then some major bad event causes the Fed to switch back to money printing as the rescue.

Suddenly, you are pouring lots of easy money (a.ka., the Covid bailout kind) into a situation of serious shortages, empowering people to astronomically drive up the price of scarce goods while doing nothing to expand the production of those goods. For example if the Biden government were to go nuts with more lockdowns in the winter. All the money in the world would not increase production, and all the government projects in the world don’t increase production, but increase consumption of all the things produced that those projects require, thereby exacerbating shortages.

The Fed and feds could easily muck things up that badly, and there is no reprieve in the news today for any of them in terms of the inflation fight.

Oil salesmen got really slippery today

Major news on the oil front today made it clear that the rise in oil prices that will certainly fuel higher inflation in everything down the road is not “transitory,” as some have already tried to claim.

Russia announced that it is banning all sales of oil outside of Russia except to a few former Soviet satellites. Somehow this exporting oil nation has gotten itself into a situation where it does not even have enough oil for itself, so its own oil prices are going through the roof for its own citizens. How has Russia, whose exports were supposedly greatly curbed by oil sanctions, suddenly wound up not having enough oil even for itself. Could that have something to do with burning up a lot of fuel in Ukraine?

For some reason, it claims to be having severe shortages to such a level that the article states that Russia’s ban will come at considerable detriment to its government revenue, which it also needs to fight its war.

So, tight supply throughout the world just became tighter.

On top of that, the Saudis prevaricated and claimed they are not trying to drive up oil prices by tightening up oil supply. They are merely trying to stabilize the oil market. Huh? That is the kind of thing you say if you ARE trying to drive up the price of oil.

The market is already short in inventory, so the Saudis are trying to stabilize the market by crimping inventory harder? That makes now sense. The strange thing is how the mainstream press did not even question them on that. They just reported it today as if it did make sense.

Nonsense, this is the kind of thing oil dictators say when they are manipulating prices upward and are getting blowback for what they are doing, so they start making up stories. Sad when the press is dumb enough to just lap that black sludge up.

Jobs aren’t cutting any slack

The labor mark that has vacillated back and forth a little over the course of the summer to look like it could be turning toward a slowdown in new jobs and a rise in unemployment, writhed another time today, putting another twist in the Fed’s claim after its last meeting that the labor market is now doing what the Fed wants to see.

The U.S. 10-year Treasury yield hit a high of 4.494%. Earlier in the day, the rate reached its highest level since 2007, with the latest catalyst being weekly jobless claims data showing a still strong labor market that could encourage the Fed to stay in hiking mode. Weekly jobless claims decreased by 20,000 to 201,000 for the week ending Sept. 16, much lower than the 225,000 claims expected by economists polled by Dow Jones. It was the lowest volume of new unemployment claims since January.

The job numbers drove bond yields up because they clearly indicated more hard work to be done in battling down inflation. Unions also made progress toward much higher wages today. At least the Writer’s Guild of America claimed serious headway was being made, and the UAW is tightening the screws and causing further layoffs in automobile manufacturing support companies.