Stocks Seek New Religion in Effort to Rise from their Decline,
The intro here was written for my last edition of The Daily Doom,but it applies equally to everything we are seeing with inflation and jobs and the stock market today (taking the trip down and up and probably down again today) because it is the same ol’ error in thinking that leaves this stock market and the Fed’s inflation foo fighters predictably confounded:
After the latest CPI inflation report, the Wall Street prophets of profits have moved to a higher level of highs as the opiate smoke circles their brains. They have shifted their dialectic from the US economy making a “soft landing” to a new “no-landing” prediction. By this they are claiming, in all their flash-and-shine prose, that the Fed may be a miracle worker, able to keep on fighting inflation while also levitating the economy. In other words, news of higher inflation made everything a little bit better.
Since it is now clear to the market gurus there will be no Fed pivot from the Eccles temple of Ecclesiastical economics because the inflation fight must go on, a newly ascendant belief has gained each Street preacher’s benediction. The pivot may be out, but the economy may just keep cruising at 40,000 feet right on past it all. Past the wars. Past the sanctions. Past a global energy crisis. Past all the other falling economies around the world. Past the searing bite of perpetual inflation. Past soaring interest rates on Himalayan mountains of debt. Past falling profits and past dying laborers. Just fly right over it all! This you should believe in blind faith solely because “jobs are staying strong.”
This rising religion of endless economic resurrection — the defeat of business cycles — is openly supported by their high priestess, Treasurer Janet Yellen, who proclaims, as the ready champion of this new dogma, “There can be no recession when the labor market is so strong.” There has never been a recession with a hot labor market, which gives the claim a gilded edge of truth. So, while inflation rose more than expected, in spite of the Fed’s fight to knock it down, stock investors, with the help proffered by their affable gurus, are trying to hold the line against the stock market’s decline under the gravity of economic circumstances that don’t square easily with the words of the prophets.
However, they are getting no help from the antsy bond market, which seems to have finally gotten its truth-telling wisdom back as the yield on the US 2YR reached up and whispered against the bottoms of the clouds at 5% — rippling upward to at an altitude not seen since the very start of the Great Recession.
The gravitas that bonds are pricing in due to still-rising inflation is pulling down on stocks as the inflow into bonds in recent days has been equal to the outflow from stocks, indicating that is where the sand in this hourglass is flowing. Secure coupon-clipping interest at about 5% for a two-year lock in as corporate earnings are falling is adding an aura to bonds to which stocks, at present, cannot compare.
But, for the average man on the street in the new economy, a pound of eggs will now buy a pound of beef.
Today’s news brings it home
We just witnessed the renewed rise in CPI, and today we have news that the pressures behind consumer price increases are also rising. In addition, we got news that the Fed hasn’t managed to make a dent in the job market, even though knocking some of the perceived heat out of the job market is one of its main inflation-fighting strategies. That supports my prediction last year that the Fed’s blindness to the real situation in the labor market will press it to tighten too far into the recession because it’s key gauge for measuring the impact of its tightening is badly broken.
The top headline in today’s Daily Doom is similar to what we saw when CPI came in hot and sent stocks flying all over the place down and up and down on the same day. (See my Valentine’s love note (NOT) to the ludicrous but predictable market response to inflation, which I facetiously titled, “Of course, Inflation Wasn’t Hot at All! It was hardly even horrible.“) As with Valentine’s Day, the market opened sharply down today on the news of high producer inflation (which drives consumer inflation because costs get passed along), and it is now trying to recover as it did on Valentine’s Day, pretending this won’t engage Pope Powell into further fighting with inflation that will damage stocks with even more interest hikes that make bonds more competitive.
You may recall that my prediction for a return to rising inflation rates in the early months of 2023 was based largely on my belief that energy would rise again and, even though it was weighted lower this year by the Bureau of Lying Statistics in their CPI calculation, it would rise by more than enough to offset its lowered weighting. And, of course, energy goes into everything, so it drives all other prices of both goods and services higher over time as those increased costs of doing business get pushed through to the consumer.
Oops. There it is: Fed talk of returning to larger rate rises after the market complacency settled into the belief that the Fed would only do two more increases of just 25 basis points.
And that would be because the labor market is very weak due to a dead and dying labor force and due to all those baby boomers now retiring as the media have been forecasting for several years as something would hit about now. Those changes in the labor market mean employers are reticent to let people go. Instead, they just move them from cancelled positions into other positions. Some of which are old positions that were closed for awhile and then get delisted as new jobs. The Fed, and everyone who follows the Fed’s way of thinking, sees the tightness as evidence of an economy that is still strong, so the Fed will tighten us deep into recession.
Thus, you see it written about in this way in the mainstream financial press:
That is how the Fed sees it. That is how mainstream financial media sees it. That is because tight labor markets usually come from strong demand for products requiring more laborers to meet that demand. That, as I said last year, will be the Fed’s KEY blind spot this year (and everyone else’s) because they are framing their view by how they are accustomed to understanding things, not really grasping that the tightness is due almost entirely to the “excess deaths” of workers who and due to the millions who have quit due to long Covid who are not eligible for unemployment benefits so are not counted among the unemployed.
Of course, no one in the mainstream appears to be investigating whether the people who are dying and getting longterm sickness are due to Covid or are due to Covid VACCINES. But articles in the alternative press have pointed out that most of the problems did not exist under the worst assaults of Covid until after the vaccines were rolled out. For the point of this article, it doesn’t matter because, either way, we are down in productive workers by millions, and that means labor, itself, if weak. Therefore, the labor market is weak. It is tight because it cannot do the work, like a strained muscle is tight from injury.
That will, of course, get passed through to consumers. We know how things work. Ultimately the consumer pays for most of this. That is why it was one basis for my economic prediction that inflation would rise in the early months of this year. Energy was the big reason it declined in the last couple of months of last year as over-speculation related to the impact of sanctions settled out of the market when winter came in gently in many areas.
Shortages, which also drive up inflation due to scarcity, will remain everywhere because the shortage of workers everywhere assures continued weakness in production (measured as GDP). That is one of the keys I provided last year for predicting that a relapse into a double-dip recession this year if virtually inevitable; and, because the injury to the labor side of production is chronic, the drop in production (called a recession) in both goods and services will be long-lasting.
But the mainstream financial press continues to report this as “evidence of the economy’s resilience,” though they got the part right that this inability to move labor comes despite the Fed’s attempts through monetary policy. What they don’t see is that monetary policy cannot bring back the dead or heal the injured and is highly unlikely as well to bring back retirees who are entitled to their pensions because 1) they earned them as part of what they agreed to work for and 2) those pensions from Social Security were their money in the firsts place, which the government promised to hold in trust until their retirement. (So, they ARE fully ENTITLED (and that’s a good word) to those funds because it is THEIR money, which taken from them on the PROMISE that it would be given back later. So, don’t let the government balance its budget on the back of money that it promised to return. Force it to honor its word and balance its budget on the back of welfare for illegal aliens, elimination on the very low cap of how much billionaires have to pay in to Social Security, etc.)
They don’t square because financial writers do not understand that labor being tight has nothing to do this time around with the old relationship of it implying demand is strong and production is growing, so needing more labor.
So, there you have it. The Fed is likely, as I’ve been saying for months, to, ONCE AGAIN have to move (not just to larger rate increases like 50 basis points) but to run them out longer because inflation is sticky and will not be backing down as easily as the delusional stock market thinks.
There it is again. Always attributing it to positive forces driving the labor market, rather than a major deficiency in available labor supply. And that is why it is nearly everyone’s blind spot, causing them to think the economy is better than it really is just because labor is tight … even High Priestess Janet Yellen. They just cannot wrap their heads around the concept that not all tightness has the same cause. So, as the Fed continues to try to force down inflation by raising unemployment, it’s going to have to do a lot of crushing to get down to where unemployment rises, as workers just shift sideways to another job that has remained opened for a couple of years since the Covidcrisis, so remain employed even after they are laid off.
As should readily have been expected.
And, for those reasons that I’ve said to keep your eye on and expect to see coming:
This is the easily predictable lesson from real-world economics that stock bulls are now getting relentlessly pounded into their bullheads. Still, some of the prognosticators are catching on: there is more to come.
While the market was betting one more rate hike of 25 basis points was going to be it — so it took off on another bear-market rally that most thought was really the start of a new bull market — economically reality is not letting the bulls run far:
That is where we have gone from the market’s phantasmic belief at the start of the year that the Fed would be pivoting or, at least, ending its interest-rate hikes in March. The new projection would be one full percentage point above where most investors and analysts were saying up until just just last week they thought the Fed would stop. Reality will keep crashing through until everyone gets it. Fortunately, you read here, so you already saw this coming.
Nope. Just more dead, dying and retired workers.
But the market ignored him because he talks out of both sides of his face. He leads off his press conferences after each FOMC meeting with tough talk, then he weakens during the Q&A to answer every question with a “but it could turn out better than we think” comment. The market, addicted to Fed funds and its own delusions, hears only the parts it wants to hear.
See! They JUST DON’T GET IT! (As I said last year they would not … until it is too late and they have tightened too long.) The truth is so obvious: labor supply is shrinking, so supply is falling far short of weakened demand; however, they’ve never seen something like this before, so it remains outside their comprehension. They are bound in old-school thinking to perceiving things based on familiar patterns.
That hardly sounds like producers are in a position of demanding more labor, and it hardly sounds like the economy has remained resilient. It sounds exactly like people are getting laid off as production scales back to reduced demand, and terminated workers are just shifting sideways into other positions that have remained open since the Covid lockdowns broke the economy.
This is what happens when you cannot get enough workers to fill positions that have remained open for years. You start scaling back, and you shift workers to areas where demand is the strongest or profits are the best. So, unemployment doesn’t rise. In some cases, workers that had two jobs, now just have one; but they are still counted as employed. Others just shift to a different employer that is starving for workers.
Of course they did … because they thought the Fed had inflation fully on the run and would be winding down its rate increases to end at the next meeting with just 25 basis points.
That’s right. Inflation is going to rise in the early months of this year, as predicted here. The battle has not been won, and the market was delusional to jump so easily to the belief that it was. But, hey, the market got religion. New religion. It found faith based on the labor market as spoken through the mouth of the high priestess and all the other adherents to this faith. It was just misplaced faith.
One of my longterm themes is that economic reality won’t be ignored. It will keep pounding through until everyone gets it, but the longer markets remain delusional, the harder they fall when the delusions that support them break. The more we save ourselves just by piling up new mountains of debt, the worse we make our problems in the future.
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