A Brutal Week for Markets

Brutal! That’s the only way to describe this week’s action. Peter Boockvar commented as follows this week: “The rapidity and velocity of the Fed’s interest rate hikes are now entering dangerous territory. I’m ok with their destination, if they even get there, but no longer the pace.

Powell of course has pegged himself as the second coming of Paul Volcker. But as David Stockman said, “The problem, however, is that the markets have become so house-trained to expect endless juice from the Fed that they are going to make it extremely difficult for Powell to carry through his Volcker wannabe act, even if he could muster the gumption to do it. That is to say, give Wall Street even a fleeting hint that inflation is abating and the speculators are off to the races, pricing in a new Fed “pivot” toward ease just around the corner.

The problem with those knee-jerk rips, like the one during June-July, is that they implicitly cancel the Fed’s tightening moves by easing financial conditions, and thereby delaying the day of reckoning both in the financial markets and the real economy. Yet in a world beset by embedded inflation, delay in snuffing out easy-money based speculation is the real enemy; and the source of eventual pressure on the Fed to raise rates even higher for even longer.

We had a hint of the market’s perverse propensity to cancel the Fed’s policy tightening campaign during Powell’s post-meeting presser yesterday. The algos took the wobbling stock market abruptly into the green upon Powell’s utterance of the single word “pause,” but then plunged it back into the red after his next verbal shift. As Zero Hedge put it ‘he stole the jam out of the market’s donut at the end of the presser by admitting that the housing market may have to go through a correction.’ That was code language for recession, of course. Thereafter, all the major indices made a beeline for the lows of the day.

You can see from our Key Metrics, there was clearly no place to hide this past week. The SUP lost 4.65%, the long-dated Treasuries (TLT) lost 3.75%, and gold fell 1.66%. Bitcoin was creamed as well, losing 3.75%, and silver went down 2.43%.

How close might we be to the end of Fed tightening? According to David Stockman, not close at all because, as he said, investors immediately start driving stock prices higher at the first hint of any kind of pivot move. Like Pavlov’s dog, their mouths water as soon as they think they hear any sound of a bullish bell, fearful that they will miss the next major bottom. One reason I think the Fed may hang in there longer this time until something significant breaks in the market is because the risks of a highly destructive hyperinflation are growing and I think they know it. Alasdair Macleod provided insights into why hyperinflation is becoming ever more likely in his September 15 essay titled, “Inflation Is Turning Hyper.” And, if the dollar is ready to hyperinflate, the Fed has to be aware that Russia and China are waiting in the wings, set to provide an alternative currency, based not on miliary might and hot air like the dollar, but on oil and gold and other commodities. Alasdair also explained in that same essay why the proposed new currency that includes various currencies and commodities as well as silver and gold would end up with gold as the only asset backing the new currency.

About Jay Taylor

Jay Taylor is editor of J Taylor's Gold, Energy & Tech Stocks newsletter. His interest in the role gold has played in U.S. monetary history led him to research gold and into analyzing and investing in junior gold shares. Currently he also hosts his own one-hour weekly radio show Turning Hard Times Into Good Times,” which features high profile guests who discuss leading economic issues of our day. The show also discusses investment opportunities primarily in the precious metals mining sector. He has been a guest on CNBC, Fox, Bloomberg and BNN and many mining conferences.