Out of Time

Behind the curve and out of control, the Fed braces for imminent recession...

(Source: Getty Images)

Bill Bonner, reckoning today from Youghal, Ireland...

You don't know what's going on
You've been away for far too long
Baby, baby, baby, you’re out of time…

~ The Rolling Stones

What’s happening now? What’s going on?  

Stocks wobbled on Friday, up… down… but ended the day with the Dow below 30,000. What will happen today? Tomorrow? We don’t know.

But all over the world – with the exception of Japan – major central banks are raising rates. Suddenly, it’s a New Era… a new economy. Homeowners can no longer refinance their houses at lower rates; now they’re facing much higher monthly payments. Businesses can no longer roll over their debt by issuing bonds at lower and lower coupon yields; soon they will default… and go into liquidation.  And even the US federal government is feeling the pinch. A year ago, the feds could borrow at 1.5% (the 10-year Treasury yield). Today, they pay twice as much.

It’s a whole new ballgame. But this is just the early innings.

Keeping with the sporty metaphor, a headline at Bloomberg tells us that the “Fed may be planning a game changer,” for its next meeting.

Debt Junkies

Yes, dear reader, for more than 10 years central bankers attended cocktail parties… ran claptrap ‘models’ with their Ph.D. economists… developed jackass theories – and left their key rates at paltry levels (zero!). Thanks to the Fed’s ultra-cheap money, stock and bond markets became gambling halls, debt ballooned up by $30 trillion, households, businesses and the government were turned into debt junkies, and the inflation cat got out of the bag.

Over the weekend, the hostess-with-the-mostest when the booze was flowing – Janet Yellen, now Secretary of the Treasury – claimed that her policies had nothing to do with high gas prices. It was not she who failed, she protested. It was the oil companies: 

“I think that producers were partly caught unaware by the strength of the recovery in the economy and weren't ready to meet the needs of the economy.

Meanwhile, back at the Fed, Jerome Powell and his fellow fantasists say they’ll whip inflation now. For sure. Flabby and out-of-shape… unused to physical or intellectual exertion… with soft flesh and withered backbones… slow to anger… but even slower to insight, central bankers prepare for the battle of their lives.

They’re in the gym at 7am. Running laps. Lifting weights. Drinking protein shakes.

But the gist of our rumination today is that Mr. Market is way ahead of them. As we saw yesterday, the Fed is “behind the curve.” It has “lost control” of inflation.

A brief explanation: The idea of counter-cyclical monetary policy (what the Fed is supposed to be doing) is to offset the swings of the business cycle by ‘taking the punchbowl away’ when the party gets hot… and bringing the hard stuff back when things go quiet. But in the great Everything Bubble, March 2009 to January 2022, asset prices, debt, inequality, speculation and financial nuttiness – all soared.  Except for a brush with sobriety between 2015 and 2018, the Fed had a bottle in its hands the whole time 

And now, the Fed is completely out of shape, out of tune… out of time… and out of sync – trying desperately to get back to trim as it faces the highest inflation in 40 years.  

Mr. Market Takes Control

The Atlanta Fed is already forecasting a recession. The first quarter of this year showed a drop in output. The second quarter, most likely, will too. According to the Keynesian “best practices” handbook, the Fed should be loosening up. Yet, instead of adding a little gin to the punch, the Fed is raising rates. 

During the Bubble Epoch, the Fed offered drinks to a financial world that was already falling down drunk. Now, it is ‘tightening’ even while the economy is going into a downtrend – once again, the very opposite of what it’s supposed to be doing. 

And yet, it has no choice. It has ‘lost control.’ Now, it must fight the inflation it caused; the economy be damned.

But if the Fed is not in control, who is? Mr. Market.

One of the curious things about an episode of runaway inflation is that it often begins with runaway deflation. In the classic configuration, a credit-driven boom leads to a debt be-drenched economy. Debtors then need cash to pay their debts, which leads to deflation. Cash goes up; prices go down. Mr. Fed inflates. Mr. Market deflates. The Fed giveth. Mr. Market taketh away. (Mr. Market doesn’t like things to get too far out-of-whack.)

Mr. Market is in charge now. He’s crashing assets – trashing stocks, bonds, real estate, cryptos, NFTs, junk bonds and other goofy assets. Prices for gasoline and consumer items, on the other hand, are rising – the very opposite of the Fed’s agenda. 

 And the Fed is out of step completely… stumbling… bumbling…

…and spilling coffee in our laps.

Regards,

Bill Bonner

Joel’s Note: Did you catch our special in-person Sunday Sesh with Bill yesterday, recorded at his Irish country residence? Readers kindly wrote in with questions about everything from currency debasement to central bank digital currencies (CBDCs) to a gold-backed ruble and plenty more besides.

We got through as many as we could in the hour or so we had before lunch and, as always, Bill had plenty of thoughts to share. You can view the entire conversation here, gratis. We’ll post a transcript on the site in the next day or so for those who prefer to read it at their own pace.

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