And That’s How it All Came Down

David Haggith

Cleaning up after the stock market crash.

On June 12, I wrote,

The market is moving into waiting mode as the Fed’s next FOMC meeting where they have the opportunity to live up to the rate-cutting hopes they’ve raised come next week. As it does, it is forming that topping pattern that keeps repeating at this level.

Frothy Bubbles Make Me Whine

Now you can easily see in the chart below that certainly fits what happened with the S&P 500, having risen only about 150 points above where it was on June 12 to now having fallen well below where it was on June 12:

In January of 2018, the S&P topped at about 2875. By October of 2018, it topped at about 2925, a mere forty points higher. In May of this year, it topped at about 2950, and now it topped at about 3025. Each time it made it about 50 points higher than the time before and then fell. And that has been during a year and a half of the greatest fiscal tax-and-spend stimulus on earth!

Since the stock market took its first plunge a year and half ago right where I said it would, it has gained all of 5%! Barely better than bank interest! Not a lot of bang for the buck when you consider the size of the buck that was spent getting it here as well as how tiny the bump in GDP has been over that same period. Trump’s average GDP growth rate in his term so far (now declining) is only now minutely higher than the average GDP growth seen in Obama’s second term:

When you consider the massive tax cuts and expansive government deficits, that’s not much bang for the buck, whether you are looking at the stock market or at GDP growth! And GDP is projected to fall even more in the third quarter.

In that same article, I also wrote,

Barring some major unexpected news, the market is most likely to simmer along that ceiling for the remainder of this week and first half of next week to await the Fed’s decision. Because the market is levitating near its last peak again, the Fed will stand pat on rates…. With the market now looking more stable and with some hope still hanging on for signs of a China deal at the G-20 summit, I think the Fed will feel it cannot risk wasting ammo until help is clearly merited.

If you look back at the top graph, you will see the market did simmer along at that same level until the Fed’s next meeting, and the Fed did stand pat on interest rates at that June meeting, choosing not to risk expending ammo unless it had to. It did, however, give free hope for an interest cut at its July meeting, also fitting what I said in that article:

The Fed will soften the news with lots of cut-rate candied hopes for investors…. They got so much bounce off of their-end-of-May jawboning that I think they’ll go for more of the same.

Those candied rate-cutting hopes gave the market a little bump following the Fed’s June meeting, but still not much and one that was short-lived, falling off by half the next week.

The Fed expressed concerns about the China trade war at that meeting, but hung on the hope that was still present for a trade-war resolution (for those foolish enough to keep clinging to such unrealistic hope), just as I said we’d see. Because the Fed got hung up on that hope, Trump decided he needed to abolish the hope by amping up the China trade war. He didn’t like the fact that the Fed opted merely to try to jawbone the market back up again; so, he decided to kick the Fed into making actual interest-rate cuts. That is exactly why the market came back down shortly after June’s post-Fed bump.

As I concluded,

You’ll wind up considering such a brief move above its all-time high a test to push to new strata that failed…. Then China re-enters the news feed at the end of June and refuses to negotiate. The market won’t like that either, and there won’t be much the Fed can do about that for another few weeks (its July meeting). By the time of the Fed’s July meeting, US data will be coming in worse,

And so China did become the main news.

From there, I went on to venture my thoughts about what would happen in July:

Under that worsening picture, the Fed will probably lower rates a notch in July because the stock market will be showing its wounds. That may arrest the stock market’s slide, but it won’t make a dent on the economic decline that is already happening (see below) and that will steepen significantly when the new tariffs and retaliation do start showing up in the stats. It might not even save the stock market because buybacks will be temporarily stopping at about that same time for the corporate reporting season, taking the only fuel that remains out of stocks for that period. Summer trading is also slowing, leaving the market placid. Moreover, forward earnings forecasts will be generally more negative than they were last time. The market will also likely experience more negativity than it wants to hear from actual second-quarter earnings.

As for some of those other bubbles, I offered a little respite in my prognostications:

I think housing in the US may get a little summer reprieve because sales have been falling for a year now and prices in some places have started to follow. At the same time, interest rates have gone back down as the Fed backed off of tightening. So that may be a slight summer light spot. I never believed housing would lead the economic decline (and have said so here a number of times) but simply that it would be a contributing factor.

And so it went. The decline in housing lightened up just a little, taking a break from its long, slow decline. Not much, but a little.

On the other hand, other economic factors got worse (also as I said they would):

The US is entering a manufacturing recession, a retail recession, the knock-on-effect of so many store and mall closures, declining freight orders and declining transportation stocks (typically a bellwether for how the economy because “if transportation is moving, the economy is moving”), an automotive production and jobs recession, declining corporate earnings growth (from which the word “growth” may start to disappear in the reporting of this quarter, tax stimulus that is fading in effect and that didn’t accomplish much to begin with), an inverted yield curve … even as the Fed continues tightening through the summer (with a six-month lag for the full effect of Fed actions on the economy).

Every single one of those things followed exactly the trajectory laid out in that paragraph over the two months that have elapsed since I wrote that article. While unemployment hasn’t turned up much yet, new jobs numbers have been cascading downward all year and. Two months ago, they finally fell below their former lowest point in years, and now they are at their lowest point since September 2012:

So, yeah, we’re now entering a jobs recession because anything less than about 150,000 new jobs means we are losing ground because the worker population is growing faster than that. We got a terrible new jobs number in June for May (only 75,000), but the stock market did its old Fed-addict move and got a big rush from that because the 50% shortfall in jobs versus expectations meant more likelihood of that anticipated late July hit of some good medicine. Such is our entirely opiated world right now. (As I said at the time, the market “is locked in dependence on recovery-mode life support where everyone is happy just because the ambulance will soon be on its way … again.”)

Finally, I summarized where we were headed summer as follows:

As part and parcel of all that, we’re experiencing declining US GDP growth, weak durable-goods orders, declining capital investments, falling prices of copper and lumber (leading economic indicators) and no supportive tailwinds of any kind anywhere. (You know, all the things I said would be eroding the economy this year in my first Premium Post of the year, “2019 Economic Headwinds Look Like Storm of the Century.”)

Check, check and check!

Stocking up by doubling down

Moving right along, the stock market started to see a July rate decrease as a 100% certainty with much of the market doubling down to bet on a two-notch drop (50 basis points), I never saw that as likely in the slightest. And that meant, as far as I was concerned, the stock market was setting itself up with such unrealistic beliefs for big disappointment … on a scale, given the market’s repeated fragility at this frothy ceiling, that could lead to peril:

The manic market lift that has come because the Fed just said it may return to delivering medication is an addict’s high, which means it should be seen as proof of bullish euphoria as well as poor thinking. The stock market has just poked its nose through its eighteen-month economic ceiling, as I said I wouldn’t be surprised to see it do. I’ve also said I believe this will turn out to be a failed test, just as it has been the last two times investors tried to poke through this level, barely succeeded and then fell hard shortly thereafter. There is nothing like peak euphoria to make that happen.

Market Mania Bets the Cash Registers Go Xi Ching!

In this article, I focused on the one area where I saw the market as being most euphoric and out of touch in its hopes. It was not just investors exaggerated hopes about the impeding Fed rate decrease, it was their completely unfounded hopes for a deal with China. So, I went on to lay out my best- and worst-case scenarios for President Trump’s G-20 summit with Xi Jing Ping.

The best-case scenario, I said, would be that Trump and Xi manage to come out of the meeting pretending to have accomplished something. The market was thinking they actually would accomplish something. My belief was that the best the market would get is fooled into believing they accomplished something.

Best-case scenario for the China syndrome: Xi and Trump agree to come out of their meeting sounding like there is hope for a future agreement soon (albeit with nothing specific that has been agreed upon). We all know there is no chance they come out with a deal. So, the best hope is they come out with Trump talking (again) like a deal is imminent and, therefore, he’ll hold off on his tariff increases a little longer. The market feels relief and breaks resoundingly through its eighteen-month ceiling.

And, so it happened. While it was clear no agreement was reached, Trump came out promising to hold off on tariffs because China, he claimed, promised to start buying more agricultural goods. I felt anyone who actually believed that was, but I was certain the market — ready as it was to be beguiled — would swallow it entirely; and, so, the market did break through that ceiling decisively (albeit ever so slightly). All three of the major indices managed to punch through because investors heard only what they wanted to hear.

What is real does not matter to a euphoric market. What matters is that investors hear a narrative they can grab ahold of in order to maintain the bull run that they want to maintain. That, of course, is a setup for failure — a bull trap, but who cares?

The stock market had now priced in a trade agreement with the same 100% certainty it had priced in a rate cut. I had no quarrel with the rate cut, except for the exceptionally exuberant belief that the Fed would cut 50 basis points on what it was billing as an “insurance cut.” Why would they waste the small amount of ammo they have on a two-notch cut that is merely for insurance reasons? That, to me, seemed entirely unrealistic; but euphoric markets have no room for realistic.

Then what? All is roses, right? Well, the market has clearly already priced in a trade agreement being reached — also, with apparently 100% certainty — so hope won’t buy a lot more headroom at the market’s top because it’s the same hope that investors have been spending all along.

Need I say more? No, but you can count on me to do so.

Hope, in fact, bought almost now headroom at the top. The market broke through the ceiling only to wind up in a hot attic with a roof so low, investors had to huddle bent over in order to hang out there and sweat it out.

Goldman Sachs noted, and I agreed …

We would expect that the President now views tariff threats as not only a successful negotiating tactic following the immigration agreement with Mexico but also a useful tool in pressing for looser monetary policy. If so, this suggests that the White House will at least threaten further tariff increases and might follow through with some of them….

That made complete sense to me. I didn’t expect the president’s suspension of tariffs would last long with the July Fed meeting being the next event of import on the stock-market’s calendar. As for that stock ceiling, I wrote,

The stock market, in the best case scenario, stalls out at its new top because there is no more good news in the pipeline right now. The Fed’s fully presumed rate decrease still lies a month away, so the market is going to be running on fumes in the face of falling earnings and falling projections for the upcoming quarter. Trump badly wants rate reductions from the Fed and may see uncertainty over a trade agreement as a way to press Powell to move on that, given that trade uncertainty seems to be what tipped him in the direction of talking about loosening the financial reins in June. Trump will want to press him from talk to action, and that’s a hard press.

And so it went. Exactly like that. I also noted,

GDP will be coming in lower because lower earnings everywhere almost certainly go with lower GDP.

And so it did.

That part wasn’t too hard to forecast because most people, by this time, recognized GDP was now back on a downward path. However, I had been saying, since the end of the first quarter, where it moved back to an upward move, that we would see it return to a downward trend.

And then more tariffs eventually come anyway if history is any predictor of the future. Whether they do or not, the market is clearly going to be bucking a lot of headwinds throughout the July corporate reporting season, and the fumes of Chinese trade hopes are not likely to sustain much lift when they are already priced in. So, in the best-case scenario, the market rises briefly, then struggles to hold against all these winds to await the Fed’s actions.

And it happened just like that. Though the president had summarized the meeting by saying, “We are back on track,” it didn’t take long for new tariffs to come back on the market’s radar screen, and headwinds soon appeared to be the best-case scenario. In the meantime, however, the stock market was back to all-time highs, and it was happy to accept Trump’s statement at face value. With the China syndrome appearing to the market’s own satisfaction somewhat settled, the market returned to pondering the Fed’s next move and its own hopes of a 50-basis-point cut. I, on the other hand, sardonically noted the undertones of this market:

Underneath all the market mania, the market must be schizophrenically anticipating news will be so bad over the course of the next month that it will kick the Fed in the butt and get them to drop their pants (or at least their interest).

But what does it all matter, so long as the market is happy?

This is why it matters:

I think Trump will likely try to use trade uncertainty to push Powell into making a rate cut in July, given that Powell has now indicated some willingness but is far from having said the Fed will do anything soon. After all, if Trump gets Powell to cut interest rates, he will feel he has proven to the world that Powell screwed up just as Trump said by raising rates as long as he did.

Do you see what was happening there? The only way to get the Fed off dead center and securely backward to rate cuts would be to push the China trade war backward, too. I was certain Trump would do that; so the hope of a return to interest cuts also meant the return to tariffs, which meant (unbeknownst to the unaware market) bad China news would certainly take the market back down. It was the formation of a catch-22 because …

If … Trump decides to actually kick in the broader and higher tariffs, you had better run for your life if you’re invested in the market because hope will come sputtering out of the market like that flatulent sound of a balloon when someone lets go of the business end…. I have said and still believe the Fed will drop rates in July because things will be so perilous by the end of July that it will have no choice, and Trump will do all he can to box Powell into that corner.

And so it went.

Where did I see all of that heading?

All of this risked the possibility (not likelihood in my mind) of taking us into Wonderland:

There is one caveat to all of this, which would be even crazier and I think never before seen. It could happen that the Fed will drop interest rates and keep dropping them through the floor and return to quantitative easing in the months ahead at even greater levels than it did before because its recovery fails. (In fact, I think it is certain that the Fed will do that eventually.) Then all that free money will have to go somewhere, meaning it will likely go into stocks and bonds, driving prices of both even higher while the economy goes into recession.

The recession would still happen because rising stocks are not going to cause the failing middle class to buy more stuff or cause the Trump Tariff War to go away. In fact, Trump so hangs his hat on the stock market, that he is likely to be emboldened by the present market high to continue with tariffs in his misguided belief that China pays for them, not the middle class. So, we could see the most bizarre and historically unique situation where the stock market and bond market soar relentlessly as the Fed kicks in preemptively with rate cuts even as the economy is crashing into recession. (Sort of like a power dive into a mud hole.)

I still don’t really see the stock market rising as a likelihood, but it remains a bizarre possibility that it would rise even in recession just because of the relentless efforts by all the king’s men to prop it up. If that happened, it would be the most vain stock market in history.

While I noted that as a bizarre possibility, the most likely scenario I said would be what is now playing out in lockstep with all of my statements. The part in the above quote that I do see playing out, regardless of what happens in stocks, is that the Fed will move beyond rate cuts and the termination of quantitative lighting, back to all-out easing, probably by the year’s end.

And, so, with the market’s dizzy hopes in mind, my next article was…

We’re O.K. They’ve Got This

All is well in the wonderful Land of Oz.

Munchkin had that same dopy-faced, thumbs-up look when he was drifting on his plastic bubble bed in a languid pool back in December somewhere in the Carribbean after assuring the world via Treasurer’s tweet that he had called all the major US banks to make sure they had adequate reserves to survive the impending run on banks. Thank the lesser god of In-God-We-Trust notes for that quick-thinking rescue!

Our Adonis above, then, gave that same thumbs-up to the pool boy to let him know, “We’re O.K. I’ve just let the world know everything is O.K.” Delighted with the fingertip potency he had just displayed to his pretty goddess wife, he floated over to the poolside bar and ordered his fifth piña colada for the morning.

Until that moment of Oz-like, scarecrow, if-I-only-had-a-brain wizardry, the world had not realized numerous bank failures were imminent.
Likewise, in the photo above, we’re O.K. now, too, because the Munch has just convinced the Over-Fed that the economy is apparently close enough to starving that it needs new rounds of forced-Fed support. We can rest assured once again because the Fed will preemptively make its first-cut rate cut during a period of economic greatness to save the investor’s land of Oz.

We’re O.K. The Munchkin who dances along the Goldman-bricked road has this covered. The bullish investor’s fantasy Land of Oz continues to live another day while the evil witch of Western capitalism lies dead under the Fed’s Eccles building.

We hope you had a great recession. With these money gods running the world from their twin Washington temples, you can rest assured the Great Recession will have its second coming. So, don’t give up; more good times are on the way!

We’re O.K. They’ve Got This

So, don’t worry about it, all right? The Fed and the Munch have this covered. And they did as could be expected.

I noted in all above that my best-case scenario was the one I was betting on, so I won’t go further into my worst-case scenario, except to say, as I did at the end of June, my …

Best-Case Scenario Has a Worst-Case Twist

What we have in July is the real economy to face, more than the fake market. Though trade tariffs are temporarily somewhat sidelined with the stock market having received what it wanted, the economy isn’t going to change for the positive one bit because of that….

We’re not going to bolt forward into any actual trade agreement when Trump want’s to pressure Powell into rate cuts. Meanwhile, the economy is deteriorating rapidly.

Best-Case Scenario Has a Worst-Case Twist

Ah, yes, there was that whole pesky thing about the economy still to worry about. Forget short-lived, fake tariff reprieves, and underserved rate cuts, we still had a month of economic news to plough through before the Fed even got to its next meeting.

What amused me during that time was the arguments I got into with other writers on other sites who claimed that economic fundamentals meant nothing. The only things that mattered were stock charts. The market would move based on Elliott Wave Theory alone or based on charts of breadth patterns, etc. OH, my the silliness of the chart heads who think their own school of thinking is the only pattern of thought to be concerned with in this universe.

It is my opinion that charts have predictability based primarily on the fact that so many stock-market investors rely on the same charts that they all see the same readings from the tea leaves, so the layouts on the charts will guide all those lemmings down the same path. They are largely self-fulfilling prophecies. That doesn’t mean they are not real in their predictive value for precisely that reason.

I think there is also merit in noting obvious patterns of support or resistance because something more fundamental than a self-fulfilling prophecy may be involved in holding the market at certain levels. There may be an economic or monetary reason the market keeps topping at a certain point as well as a solid fundamental basis for it to not fall below a certain point or to bounce back to a certain point if momentum does carry it briefly below.

That said, all my predictions are based on market fundamentals, so I went on to note the pressures the economy would be putting on stocks, which is where I had already stated the market in July would be running on fumes — the ethereal hopes of a China trade deal, the overinflated hopes of a 50-basis-point rate cut that would never emerge, all served up on an economy that is moribund.

Maybe the S&P will even manage to do a hail-Mary to the bull’s long-forecast 3,000 mark, but I wouldn’t hold out hopes that it will hold above its very gradual upward trend line for long. I’m not saying that based on any chart forecasting, but just based on the fact that it hasn’t managed that in a year and a half of trying, and there is not likely much good economic news in store.

And so it went. Twenty-five points above 3000, and that was all she wrote before the next precipitous decline began. Thus, I stated in my worst-case twist to the best-case scenario…

We’ll still see elements of my worst-case scenario playing out because the reprieve from Trump’s G-20 summit with Xi will be short-lived…. I think we all can agree that Trump will do all he can to get Powell to do that under any scenario. We also know Trump loves being unpredictable all the time and loves surprises, so I wouldn’t be surprised if he tries to walk his talk both ways by continuing his threatening talk about tariffs in order to keep both Xi and Powell on edge. Talk may be light for a day or two in order to get some market pop out of the G-20 meeting, but thereafter, I think Trump will want to hold Xi’s and Powell’s feet to the fire. The cost to that is an economy in turmoil because businesses have no idea what to plan for; capital investment stays on the fence; consumers don’t know what to anticipate.

And just so all of that went, too.

The market may rise again because of the Fed’s cuts, but these cuts happen in an entirely different environment and are not the good news the market has been conditioned to believe all cuts are over the past ten years…. This next rate cut will only mean the Fed has conceded that its recovery has failed and the economy is back in peril.

I’m not sure the market has fully grasped that even yet, but it is in the throes of grasping it right now. Thus, I had written in the worst-case scenario that seemed to be penetrating even my best-case scenario…

A market crash could happen even in the best-case scenario if corporate reports are bad enough late next month to indicate recession is at our doorstep and if GDP falls while buybacks are halted while Trump tries to create more uncertainty about a trade deal because he is currently confident in the market and wants to pressure Powell.

Yes, those FUNDAMENTALS trade and monetary policy all add up to a lot of bad stuff pounding down the market that have nothing to do with charts, whether they happen to align with someone’s charts or not. These are the forces the market is now contending with, as foreseen here more than a month ago.

In other words, after a burst of renewed and ill-conceived hope, the market will have more than the usual wall of worry to climb. If the Fed fails it, I would expect an all-out panic because the bulls are vesting all their hope over the next month in the Fed. Their hope will not be based on economic data, other than on the inverse hope that bad economic data assures a Fed rate cut…. Imagine what would happen to the market if the Fed failed to cut interest rates and then the Trump Tariff War heated back up!

Imagine, indeed. Or just imagine what would happen if the Fed simply failed to cut interest rates as much as the market was hoping!

The manic market is hoping for two mutually exclusive things — a China trade deal that will take away the earnings problems that are now endemic and the lack of China trade deal to press the Fed to preemptively lower interest. It is even irrationally refusing to recognize the historic fact that lowering interest rates when the economy is supposedly in recovery only happens when the Fed believes its recovery is about to fail, and no stock market has ever done well as we are plunging into recession. That’s a lot of crazy, and crazy doesn’t end well.

And so that went, too.

As I further stated,

Already-fully-priced-in rate cuts won’t give much lift beyond the end of July in a diminishing economy if the Fed comes through, but failed rate cuts pull the rug out from under everything. The market is priced to perfection with little upside potential and a lot of downside.

The “fully-priced-in rate cut” was a drop of 25 basis points. That’s what the market got, and it gave the market exactly one day of lift before it tumbled again.

Munchkin led us to believe he and the Fed would save the day, but The Munch didn’t save trade with China, and he and the Fed working together on interest wound up not accomplishing anything either because the Fed went too little to appease a market so greedy that it yearned for a falling economy just to entice the Fed into injecting a larger dose of the dope of hope.

It turns out Trump trade talk trumps the Munch. It wasn’t enough for Trump to threaten higher tariffs on China, he doubled down by going back to talking higher tariffs on Europe. Anything to pique Powell’s pressure points.

Trump has turned to increasing trade tensions via Europe in order to keep pressing Powell to give that rate decrease for which Trump has been begging. Trump is begging because those monumental Trump Tax Cuts have netted almost nothing for the US economy, which is fading under them. Trump knows the main driver for the stock market — which he wears as his badge of economic success (never mind that it is, as I said in my last article completely “unhinged from the economy”) — is the Fed!

Since the economy, itself, looks like food for worms, Trump desperately needs the stock market to rise because many people mistake the stock market (long an indicator of the economy, but no more) for being the economy. If stocks are up, the economy must be up. With the economy now sinking, the stock market is entirely fed by the Fed because there isn’t any economic juice. It’s got nothing else to grow on. (Or very little anyway, as I’ll lay out in my next article.) So, Trump has turned to ratcheting up trade tensions with Europe in order to keep holding Powell’s feet to the flames.

Cleaning up after the China Trade Summit Looks Exactly Like I Said it Would

That became the theme for July — hold Powell’s feet to the fire to get him back to juicing up the stock market.

If … the Fed doesn’t budge on rate cuts at the end of July, we switch instantly to my “worst-case scenario” where the market gets immediately buried.

Well, we may have gotten there even with a rate cut just because it was less of a rate cut than the market wanted.

I’m still leaning to the likelihood I’ve stated all along of rate cuts in July, and the economy collapses anyway, taking the stock market down with it — because that is where we are going regardless since the Fed’s tightening is already bursting its recovery bubble — but the market will crash a lot harder and faster if Powell doesn’t deliver on the market’s demands

Let’s move on to what I wrote in July

It was, however, not just Trump that was holding Powell over the fire like a pig on a spit, but the stock market pigs.

Stock market investors, hungry for more pork, are demanding Fed Chair, Jerome Powell, land on their table on a silver platter with an apple in his mouth at this week’s congressional testimony. Will he deliver? Powell has a thin red line to talk, or this overFed market, which he and is cronies have nurtured, dies this week from its own morbid obesity

Stock Market Pigs Hold Powell Hostage to Deliver the Bacon

However, Powell didn’t walk that line very well. He managed to give a miserly rate cut, stop QT, and still crash the market by talking it all back. Some have said it was one of his worst performances yet.

Receiving delivery of the Powell pork is the only way the market will punch through the enduring ceiling shown in the chart below. If Powell walks a tight line perfectly in congress this week, the market will impatiently await his delivery of pork bellies at the end of the month. If he looks like he’s trying to create wiggle room to walk away from rate cuts that the market has perceived as a promise, the wiggly little pig is going to get his bacon burned along with his porcine friends on Wall Street.

Well, he did talk his way perfectly through congress. In fact, his talk at that time was so full of the delightful aroma of pork in the hot air rising from the fire that was roasting him that he convinced the market a 50-basis-point cut was coming to where the market, at one point, priced that in with nearly a 100% certainty.

That piggly wiggly talk, however, is what set the market up for failure when Powell failed to deliver on the hopes he raised and even walked them back after the Fed’s July meeting. So, Powell baked his own bacon by raising the heat on expectations and then failing to meet the market demands that he all by his own little self managed to raise. (Albeit, he did have help from other Fed members, but his own talk was enough to turn up the flames on his own feet, and he apparently was too foolish to recognize the potentially dire results his own raising of false hopes could bring about.)

Powell is the prince of falseness. He raised concern that quantitative tightening (balance-sheet reduction) would continue for a couple of years on autopilot, and then had to curtail that statement in a hurry because it sent the market into the immediate autumn tailspin I had said tightening would send it into in the fall. He raised the threat interest-rate hikes that he said would continue until the Fed reached a much higher level, which he said was the neutral rate, only to walk that back three months later by openly admitting that, apparently, the neutral rate was much lower than the Fed realized. He said QT would continue through September of 2018, yet he had to bring it to a full stop at the end of July. After all of that, he built up hopes of bigger interest-rate cuts than he planned to deliver, fully insuring his interest-rate-cut when delivered would plunge his beloved market, rather than lift it.

We need not talk of the “Powell put” any longer. It is more like the Powell punt. Talk big and deliver little.

As I warned the little fella, if you’re going to talk big…

Fork over the pork, Powell, or the market will eat you alive while Trump thumps your sorry little behind for an economy that is failing everywhere on his and your watch. I won’t feel sorry for either of you if you both go down for this together, each deflecting blame to the other.

But there is far more to be concerned about than the bloated, pork-stuffed market full of pigs:

Even if Powell lands in the middle of this table of investors with the apple in his mouth and, thereby, manages to push the fake stock market above its bounds, the economy is not going to follow. The stock market’s response to its peyote-packing priest at the Fed is immediate and often even premature as seen by its current high where it has been betting with absolute conviction by fully pricing in a rate cut that hasn’t materialized yet as if it were real — so full of faith are the Fed faithful.

We sometimes forget that the economy is FAR more important than the stock market. It may not be so to traders, but it is for investors — those being the (now rare) people who actually buy stocks in order to own a good company. It is to the average person who works for a living. It is to Main Street business owners. We spend so much time thinking about, “Oh, my gosh, where are stocks going” that we almost act as if we care less where the economy is going.

Clearly stock traders care less about the where the economy is going because they revel in news that the economy is declining. All that matters to these pencil heads is that a falling economy will guarantee more Fed meds. (Not too much decline, though, or that might actually manage to bring down their beloved market from its godlike status and zenith among the stars.)

Some of these extreme chart traders have fallen into the trap of thinking thinking stocks are just casino chips. Ultimately, however, stocks are all about profits. If the economy fails, profits fail — regardless of what charts say — and stock prices eventually have to capitulate. Based on this extremely dysfunctional disconnect in people’s minds between stock values and the economy, which the Fed has fostered for the past decade, I also suggested,

The divergence between the economy and the stock market is going to get more bizarre than anything we’ve ever seen if Powell delivers the dope to drive the market to new highs.… Which do you think will ultimately prevail then — the gravity of our deteriorating economic situation (see “Ten Big Steps down the Road to Recession“) or sniffing jet fuel out of the Fed’s exhaust…? Let’s just agree the Fed has created a monster pig of a market right now, and this monster pig will become an enraged and squealing monster pig if the Fed doesn’t feed it … and quickly.

I think it is, therefore, fortunate that Powell did NOT deliver the dope to drive the dependent market higher. We don’t need a market that is even more out of touch with economic reality.

As I summed up in a later article,

My most-likely scenario for June and July has been that Trump and Xi would agree to continue talks but not get much accomplished and that Powell would talk the market up and will ultimately give the 0.25% rate increase the market is demanding. I’ve never believed he has the courage to crash the market (the worst-case scenario I presented for June and July).

Chairman Powell Moves toward my Recession Prediction and Helps Trump Trade War

He caved as predicted to Trump and market pressure, but his 0.25% cut didn’t do the job he hoped it would. The market’s failed response was anticipated here where I said a 0.25% rate cut…

will give stocks a brief bump — not much of one because it is already priced in; but there is always a little halelujah dance when the moment arrives and does what it was supposed to — a relief rally as the pressure of waiting and wondering is lifted. Then reality sets in a day or two later….

Indeed it did.

What happens during those days leading up to and after the Powell put [again, let’s now call it the “Powell punt”] is going to be increasingly bad economic news…. That news will be trouble for stocks and probably good for bonds (lowering yields, which makes the bonds that are already in bond funds worth more because they have higher yields). Money moving out of stocks could seek safe haven in bonds, pressing bond yields down ever more.

And that‘s how it all came down … exactly as anticipated here.

Via The Great Recession Blog


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