Wow! What a Difference a Day Makes

As my own attempt to sort through the chaos of Fedthink in this weekend’s “Deeper Dive” moved from “They must see a major recession hitting” to “No, they are just idiots,” the Fed’s Goolsbee, today, throws all his weight onto the “idiots” position:

A Federal Reserve official said Monday that the market may have misunderstood the central bank’s intended message last week after stocks and bonds rallied sharply.

“It’s not what you say, or what the chair says. It’s what did they hear, and what did they want to hear,” said Chicago Fed President Austan Goolsbee said on CNBC’s “Squawk Box.” “I was confused a bit — was the market just imputing, here’s what we want them to be saying?”

You at the Fed are just learning this? You are just figuring out that Fed-addicted markets now hear only what they want to hear to feed their testosterone-raging mania and greed? Wow, are you slow! That confirms my “idiots” position from, at least, one Fedhead as to why Powell shot himself and the whole Fed gang in the foot last Wednesday.

I’m not suggesting the Fed should ever set its policy based on how it thinks the markets will react. As Goolsbee says, that would be circular. The Fed should set policy with little care to how markets react. However, the Fed surely should know how the market will react after seeing almost two years of the stock and bond markets’ ridiculously euphoric fantasy about an imminent Fed pivot ever since the Fed started tightening, and it should set its communications with that audience in mind since the market’s reaction greatly affects the tightening or loosening achieved by policy.

In other words, Powell knew he was showing the market the FOMC dot-plots on anticipated interest-rate changes in his communications, and he should have known the markets would leap all over that red meat while the market mavens in financial media leaped over themselves to turn it into a narrative supporting the markets’ endless pivot fantasies. That circle between Fed, media and markets happened instantly among all financial media, even most of the alternative media. Therefore, Powell should have tailored his communications to cut any idea of a Fed pivot off at the pass.

As I laid out rigorously in my “Deeper Dive” this weekend, THERE WAS NO PIVOT HERE, NO CHANGE IN FED POLICY AT ALL, NO HINT THAT THERE WAS A PIVOT EVEN BEING TALKED ABOUT. There was just an expression of beliefs by Fed decision-makers as to what inflation would allow them to do with interest rates in the future (in the form of those dot plots where each FOMC voting member puts a dot on a graph where that member expects rates will go in the years ahead); but the Fed’s Federal Open Market Committee members clearly said in their summary statement that what they actually do in the future will depend entirely on what the data, then, shows them about inflation and other factors, not on what their guesses are today. Powell repeatedly said the same. (And their guesses have notoriously been wrong at every meeting and revised at the next meeting by none other than themselves! So, that is all they are is guesses.) Yet, Powell talked in such soft terms and offered the marketeers some really juicy stuff for their hopes to chew on.

Stock and bond markets heard what they wanted to hear from his presser and said it meant a pivot was coming. Powell should have known the markets would respond that way and should have vigorously tamped down that interpretation of what he was saying. Instead, he threw gasoline on it by laying out ridiculous hopes that supply constraints were about to end their contribution to the inflation equation, so I laid out in that “Deeper Dive” how his actions caused that miscommunication and why he should be admonished for it and how much damage it did to the Fed’s plan, as well as the greater risks he has created if the Fed now pushes back on that misinterpretation, which the Fed enticed the market to make by how it handled its communications.

Thus, to walk back the damages to Fed policy from the hyperbolic over-reaction of markets and all the claims that the Fed had pivoted, even on Zero Hedge, they trotted out Fed Prez Mester to clarify again,

“The next phase is not when to reduce rates, even though that’s where the markets are at,” she said. “It’s about how long do we need monetary policy to remain restrictive in order to be assured that inflation is on that sustainable and timely path back to 2%.”

I.e., if not higher, at least, for how much longer?

“The markets are a little bit ahead,” she added. “They jumped to the end part, which is ‘We’re going to normalize quickly’, and I don’t see that.”

The markets certainly did take a huge leap out over nothing, and that was largely my conclusion in the “Deeper Dive,” once I had time to listen to Powell’s words for forty-five minutes during the weekend, instead of just every article in the press, mainstream and alternative. However, the fact that stock and bond markets both leaped over hot air doesn’t change the fact that Powell should have easily anticipated that reaction from the predictably over-hyped, over-adrenalized stock market and the world’s most moronic bond market. You have to read the room, Powell! Good grief, you’ve been doing this job for years now.

If you think inflation is diminishing—a flavorful scrap of meat that Powell held out to the slavering markets in his tidbit treats of hope—because the supply problems are over, you should see the supply issues I laid out as examples to the contrary in that “Deeper Dive,” saying “I doubt it!” One of my main points EXPLODED already today into a major war issue with the US and dozens of allies stating their ships will be patrolling the Red Sea and Persian Gulf region because pirates and terrorists are creating a MAJOR SHORTAGE crisis by ending shipments through the Suez Canal. I haven’t counted, but one map looked like a hundred military ships from ten nations have gathered all around the Arabian peninsula.

What was an emerging supply problem in yesterday’s “Deeper Dive” based on announcements of shipping companies, blew up into a major active war footing in the news today. (See headlines below for the stories quoted here.) The Houthi attacks are stated in the news today to be already pushing shipping costs higher, with analysts noting they can easily go up more from here. With shipping costs up and supply down, prices will rise.

The attacks have already pushed ocean freight costs higher. Since the beginning of the Israel-Hamas war, the Asia-U.S. East Coast prices climbed 5% to $2,497 per 40-foot container, according to the Freightos. It could get even more expensive as major companies avoid the Suez Canal, which feeds into the Red Sea, and opt instead to go around Africa to get to the Indian Ocean.

Doing so adds up to 14 days to a shipping route, incurring higher fuel costs. And since ships take a longer time to get to their destinations, the workaround results in a perceived “vessel capacity crunch.” Delays in container and commodity deliveries are inevitable….

“Approximately 19,000 ships navigate through the Suez Canal annually,” Aldwell said. “The extended time spent on the water is anticipated to absorb 20% of the global fleet capacity, leading to potential delays in the availability of shipping resources.”

There will also be delays in returning empty containers to Asia, which will only add to supply chain woes, he added….

“This situation, if it extends beyond a few days, will have credit positive implications for both the container shipping industry and for tanker and dry bulk markets,” wrote Daniel Harlid, senior credit officer at Moody’s. “But it also raises the risk of further disruption to supply chains.”

So, as I said over the weekend, Premature Powell’s claim after the FOMC meeting that supply-line problems are now transitory will likely prove as deeply moronic as his similar claims about inflation back in 2021, which were also based on supply problems (from the pandemic) being a fading “transitory” situation. (But who coulda thunk that war in the ME would possibly cause supply-chain crises all over again?) Powell’s statement about supply-chain issues now resolving shows he is basing his prognostications about monetary policy on whimsical hopes. This has huge implications for 2024, and Powell threw gasoline on the flames of inflation with just his words, even if a pivot never happens … and certainly no pivot has been offered by the FOMC.

My prediction remains NO PIVOT until Powell & Co. have crashed everything so badly that we’ll already be deep into this recession by the time the Fed changes actual policy. The damage will be done—the entire Everything Bubble will be coming down around them (and us)—and then there will still be months of lag time on Fed policy to play through with more damage after the policy change. That kind of belated turn is hardly a “pivot,” which is a snap turn.

With a major coal-bearing railroad getting blown up in Columbia in today’s news and the announcement that 22% more shipments through the Panama Canal were cut in November than in October and that larger cuts are scheduled to come, it sure looks a lot to me like a resurgence of the supply issues in 2024. Different causes, same troubles. Two major canal routes getting knocked out for different reasons — one war, one natural:

And for the first time since the drought began, the numbers are not just falling at the older, smaller Panamax locks. They’re also declining sharply at the larger Neopanamax locks, which debuted in 2016.

The Neopanamax locks are a crucial conduit for high-capacity container vessels bringing goods from Asia to U.S. East and Gulf Coast ports, and for liquefied petroleum gas (LPG) and liquefied natural gas (LNG) carriers transporting exports from the U.S. Gulf to Asia….

Container ships, LPG ships and LNG ships were all hard-hit on the Neopanamax side. At the Panamax locks, dry bulk shipping was the biggest decliner, by far.

I’m sure there will be no problems there for energy costs then … or food shortages and costs (right, Powell?):

This time of year is the height of the export season for American farmers, when grain cargoes traditionally move via the Panama Canal from the U.S. Gulf to Asia.

Fortunately, there was a crisis-sparing route for many shipments:

These transits have gone off a cliff as grain-laden bulkers have shifted to the Suez Canal.

Oops. Strike that. (The article goes into all kinds of additional details about the rapidly mounting shipping problems through Panama.)

Regardless of how serious the military response to the Houthi blockade of shipping does or does not get, the situation clearly shows how completely ridiculous Powell’s statement was about diminishing supply shortages easing inflation in 2024 as does the worsening crisis in Panama. I pointed both of those supply issues out earlier as well.

How can you possibly think a war in the Middle East will not impact supply lines, and how could you possibly think it did not impose serious risks to the price of oil, which was almost the only thing that delivered Powell any success on his inflation goals due to recent huge energy price drops? As I stated in earlier editorials and in the weekend “Deeper Dive” those price drops could rapidly vaporize due to the conflict in the Middle East; and under the inflation section in the news headlines below, we see they are going away as prices rapidly rise back up in the face of the ME conflagration that is taking place.

Oh, and this ought to help Powell’s promising overtures about the direction of “falling inflation” with the latest data from November now in:

Reuters

Just a little gift from the broken, constantly gyrating, ever-perplexing labor market, which has been one of the key broken gauges guiding Powell policy and causing the NBER (National Bureau of Economic Research) to stay with not calling this a recession because “labor is strong.” Ack! Or just broken and not on the job so you pay what you have to due to one more critical supply shortage—labor supply—that gets passed on to everyone in higher prices.

I could hardly have a day come in and underscore everything the “Deeper Dive” said yesterday more than happened today. So, I’m staying with my prediction that inflation, which is clearly already on the rise, as predicted here, keeps rising as we go into 2024, and the recession that is already here, as predicted, keeps growing. (You can see the full basis for that prediction in an earlier “Deeper Dive.”)

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