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Cognitive Dissonance Hammers my Head
David Haggith

Do you want Fedworld or Realworld?

In the real world today, the Dow is negative for the year, with a third of the Dow down double-digits. At one point it was down over 400 points today. The S&P retired the day fully in correction while the NASDAQ, as I noted in the paid portion of yesterday’s “Deeper Dive” entered the correction zone Wednesday and crossed below its 200-day moving average on Thursday. It attempted to rise today on the positive energy of Amazon, which reported huge earnings, but it lost a good part of that rise by the end of the day. Unfortunately for it, its valiant effort was not enough to prove its bearish cross on Thursday was just a head-fake. So, it stuck the landing down in those nether regions, and stocks closed the week with a heavy thud. That’s Realworld.

CNBC said fears of recession troubled the market in Realworld. How could that be when most of the nation’s most successful market gurus and snake charmers in Fedworld were saying last week the risk of recession was behind us now, and only a month ago everyone in Fedworld was still talking about the “new bull market.” Was it the shortest bull market in history — more of a calf market — a weak-kneed, just-born calf at that? Maybe stillborn would be more like it.

The Dow was pressured by declines in JPMorgan Chase after CEO Jamie Dimon said he planned to sell 1 million shares next year.

Jamie Demon who lives between Fedworld and Realworld said his decision had nothing to do with the condition of banks, and maybe it didn’t, but I’ll note the world’s biggest bankster forecast late last spring that a second wave of bank failures was coming not far down the pike, as reported here, due to the wealth-gobbling, commercial real-estate collapse. (Because a commercial real-estate collapse is surely a sign of a “resilient” and “strong” economy the snake handlers have all been talking about.) 

The Demon is also the one whose biting disparagement I quoted this week about the Fed’s poor track record in seeing imminent Realworld recessions as the Demon forked the Fed in the butt for being “100% dead wrong” on inflation 18 months ago. Dimon also criticized the misguided puffery that central banks are “omnipotent” or that they “can manage through all this stuff.” He said “I’m cautious” about that. Maybe this is him being cautious.

Why did he say he was cautious? Simple: “This may be the most dangerous time the world has seen in decades,” he said.

That’s some clarity. I certainly won’t disagree with him.

We also saw this week that some mega-tech stocks with star-fire quarterly reports got trodden into the mud down here in Realworld if their featherless lizard leaders even whispered doubts about forward sales or earnings. Sounds weak-kneed to me.

Of course, yet another inflation report that showed a rise in inflation over last month didn’t sturdy the will of the wannabe bulls. A University of Michigan report showing that inflation expectations have surged higher added to the market’s morose mood because marketeers expecting inflation tend to price it in, so do manufacturers and so do laborers striking for more of the pie. At the same time, consumers tend to cut back, taking their supposed resilience away from the table of consumables.

It was a big bump:

Zero Hedge

This decline was driven in large part by higher-income consumers and those with sizable stock holdings, consistent with recent weakness in equity markets.

Some have called that the “richcession.” But, if the rich think they are feeling it rough because of their stock losses, let me assure them that the average working stiff is feeling it a lot rougher due to inflation eating holes he can ill afford in his pockets.

Across all consumers, one-year expected business conditions plunged 16% and expectations over consumers’ own personal finances in the year ahead fell 8%, reflecting ongoing concerns about inflation and, to a lesser degree, uncertainty over the implications of negative news both domestically and abroad. "...signs of consumers’ frustration over inflation appeared throughout the interviews.”

It sounds as if that resilient Realworld consumer lauded by Yanet Jellin’ is holding up just fine like she says right along with those fetching bonds that are fetching higher yields solely because investors believe, according to Yanet, the bond savant, that the economy is “strong.” I foolishly thought it was inflation expectations that drove yields higher. I guess she assumes inflation comes only from strong economies and not from Fed money printing (HER money printing) and government stimulus checks (HER signed stimulus checks) coupled with supply/product shortages and service shortages due to lack of labor that seems to have been partially killed of in the Covidcrisis (whether literally or just mathematically). I am sure all of that is too complicated for her.

Surprisingly, the consumers in Realworld recognize that unemployment in this twisted labor market is not as likely to rise as in other recessionary periods (or at least to rise as early in the downturn) and inflation in those volatile, phantom energy prices that the Fed likes to cut out of its favorite inflation gauge are the very monster that will eat them alive:

Year-ahead gas price expectations reached their highest reading since June 2022. Over 80% of consumers specified that inflation would cause greater hardship for consumers in the year ahead than unemployment, the highest share in 11 months.

Huh? Imagine that: the same things I’ve been fretting about this year. They are probably feeling down because they are not feeling Papa Powell is their pal. They may even be feeling Gramma Yellin is putting some of the green stuff in her brownies. And I don’t mean all that money she’s printing.

While consumers recognize that inflation has slowed down from its peak last summer, they cannot ignore that their budgets remain stretched and their purchasing power reduced

Yeah, because month-over-month inflation is rising again, and that is what matters in this phase of the cycle, not year-over-year, and I’ll tell you why. 

The core personal consumption expenditures price index, which the Federal Reserve uses as a key measure of inflation, increased 0.3% for the month, in line with the Dow Jones estimate and above the 0.1% level for August.

For some inexplicable reason Zero Hedge, today, chose to focus on the fact that YoY inflation was down a notch and to underplay the rise in month-on-month inflation. But, OF COURSE year-on-year inflation is down! We have had many months of the Fed bringing down inflation from where it was a year ago. It would take MANY MONTHS, therefore, to get inflation back up to where it was a year ago, and we’ve only had three months of slowly rising inflation. That is why I say it is those MONTHS of rising inflation that matter because, if you keep raising them at that pace from month-to-month, that is how you get to where YoY inflation looks as bad as it was to begin with!

According to Fedworld,

Even so, strength in incomes continues to support aggregate spending.

Pardon the pause. I’m just returning from the bathroom because I had to puke. In Realworld, I read the following:

About 2 in 3 Americans say their household expenses have risen over the last year, but only about 1 in 4 say their income has increased in the same period, according to a new poll from The Associated Press-NORC Center for Public Affairs Research.

Incomes have not kept up with inflation, so could it possibly be, as I was thinking, that all that soaring credit-card debt talked about in the Epic Economist video below is what is enabling the weary (not strong) consumer to keep on spending, buying less but paying more to get it? Yes, spending did run ahead of inflation; but J. Powell says consumers are remaining strong because they are finding ways to buy lower-quality products to beat inflation. That is not how you beat inflation. It is how you survive its efforts to beat you. If you are not getting less quantity through smaller portions, you’re getting lower quality. That’s inflation beating you.

In Powell’s world the consumer feasting on chicken is doing just as well as when he sometimes dined on filet mignon. That is because Powell always dines on filet mignon topped with black caviar, which isn’t even in the inflation basket of goods the Fed tracks. 

The Fed prefers PCE as its inflation measure as it takes into account changing consumer behavior such as substituting lower-priced goods as prices increase.

In other words, if consumers move from something that is tracked in the inflation basket of goods to substitute with something less expensive, PCE starts tracking the cost of what they moved to, and stops tracking what they left because it was too high priced. However, you would not have been buying what you were if you didn’t like it better. So, how is moving from the price of beef kabobs to the price of deep-fried-honey-roasted crickets not a hit from inflation when you live on it for the rest of your life? The Fed likes to pretend you’ve beat inflation on that one, rather than accommodated to it with a loss of lifestyle.

As for that economy that Powell and his colleague Janet keep yellin’ about as “strong…”

Finally, we note that the overall index of economic news heard by consumers worsened about 15% between last month and this month, reaching its lowest reading since June 2023.

Huh? Was that news from Zimbabwe? I’m suffering a little cognitive dissonance here that is making me feel like another trip to the bathroom, as I try to figure out how economic news that is 15% worse in just one month could have come so quickly from an economy that was “resilient’ and “strong” during that same month.

OK, back, but to get the remainder of Fedworld v. Realworld plus the video, you have to join the real world by becoming a paid subscriber because, in the real world, that is the only thing that keeps these articles going, and I live in the real world:

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Seeing the Great Recession Before it Hit

My path to writing this blog began as a personal journey. Prior to the start of this so-called “Great Recession,” my ex-wife had a family home that was an inheritance from her mother. I worked as a property manger at the time, and near the end of 2007, I could tell from rumblings in the industry that the U.S. housing market was on the verge of catastrophic collapse. I urged her to press her brothers to sell the family home before prices dropped. The house went on the market and sold right away — and just three months before Bear-Stearns and others crashed, taking the U.S. housing market down for the tumble. Her family sold at the peak of the market.

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