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We Can Now Project When Fed Will Pause, But Not Reverse

The PPI reading on Wednesday includes data which now enables us to project when the Fed will stop raising the Fake Funds rate. I call it fake because it merely mimics the market, but isn’t actually the short term money market. Nevertheless it’s what the Fed and the Street want you to pay attention to, and it’s what most sheep do pay attention to. I say Bah!

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I was able to make this projection using a highly sophisticated algorithm developed by artificial intelligence, that being my brain drawing trendlines. It’s a technique that I have developed over my nearly 60 years of studying technical analysis, including 40 years of computer generated analysis. Non-subscribers, click here for access.

Naturally this formula is far too simple, direct and obvious to be recognized by the high priests of Economism. But I have spent my life specializing in simple, direct, and obvious, which is all that I am capable of. And so, I will attempt to the best of my ability to illustrate it for you. Non-subscribers, click here for access.

Using this secret algorithm I was able to determine that the Fed should announce a pause in rate increases next xxxxxxx. The market will briefly celebrate that, but that will be a big mistake. Because the Fed has never actually raised rates and rates aren’t the problem. They are a symptom. The market has driven rates up and the Fed has rubber stamped that, while never quite getting to where the market already was. Non-subscribers, click here for access.

Now, for the illustration of how xxxxxxx was projected to be the point at which the Fed decides to pause. xxxxxx is when the trend of the Fed raising the Fake Funds rate intersects with a somewhat likely trend of the Fed’s favorite inflation measure, the Core PCE. Non-subscribers, click here for access.

CHART Non-subscribers, click here for access.

I use the just reported PPI for core final demand consumer goods (PPI-CFDCG) as a leading indicator of where the PCE is likely to be headed. The PPI-CFDCG dropped from an annual rate of +8.5% to +8% in September. This was the first decline in this series, which tends to lead CPI and the Fed’s favorite measure, core PCE, by anywhere from 3 to 12 months. Non-subscribers, click here for access.

Note that this downturn follows the beginning of the Fed’s Quantitative Tightening or QT, by 6 months. That’s also normal. Non-subscribers, click here for access.

I then drew a trendline extrapolating this downturn into the future. The validity of doing that is supported by the fact that the upswing rose on nearly a straight line basis as it followed Fed pandemic era QE with a lag of about 6 months. As goes the money supply, so goes inflation, the one thing that Milton Friedman got right. Non-subscribers, click here for access.

By the way, “inflation,” doesn’t mean only consumer prices. Inflation is classically defined as a rise in the general level of prices. General means everything. That includes asset prices. Modern priests of Economism exclude asset prices from the definition of inflation, so that they can conveniently ignore the jillion percent increase in asset inflation we’ve seen over the past 13 years. Non-subscribers, click here for access.

The only inflation they accepted as real was consumer price inflation. And that is utter nonsense. The refusal to recognize asset price inflation as an element of general inflation is at the very crux of the intractable problem we face today. Now we must pay the price for that willful ignorance. Non-subscribers, click here for access.

So now we see the impact of reducing money supply on both types of inflation. The problem the central banks have in their drive to reduce consumer price inflation is that asset prices react immediately and directly to tightening money supply. Consumer prices react with a lag. Asset prices, both stocks and bonds, have already collapsed. Consumer prices haven’t budged yet. Non-subscribers, click here for access.

And now we can see that this process will continue for months. It has the potential to cause unfathomable financial destruction. Non-subscribers, click here for access.

This is a huge problem for Wall Street. Because of the nature of the Fed’s inflation fight, the tightening of money supply versus rising money demand, is absolutely destroying asset prices in a process that will continue until the Fed stops tightening. Non-subscribers, click here for access.

Again, the Fed Funds rate is irrelevant. To halt the downtrend in asset prices, the Fed must stop reducing the money supply and must start increasing it again by an amount sufficient to absorb almost all Treasury issuance.  Non-subscribers, click here for access.

The Fed pretends that it will only stop tightening when the Funds rate that it sets every 6 weeks is supposedly neutral. The Fed’s focus is on the PCE, and the PCE follows the curve of the PPI finished core consumer goods series by a few months, at a lower level. We can therefore project the trend of PCE by mimicking our favorite PPI trend as I showed in the chart above. Non-subscribers, click here for access.

In so doing, the falling core PCE would meet the rising Fed Funds rate in xxxxxx. The Fed will yell “Pause” in a crowded theater, and everybody will rush into the market. There will be a buying panic when that happens. Non-subscribers, click here for access.

But the buying panic will quickly die and the collapse of asset prices will resume unless the Fed also reverses from QT back to QE. Because the money market would otherwise continue to tighten, and short term rates would resume rising. Non-subscribers, click here for access.

The markets get a break in xxxxxxx because the US Treasury xxxxxx xxxxx xxx xxxxxx xxx then. That enables the Treasury to pay down T-bills in xxxxxxxx xxxxxxx xxxxxxx xxx x xxxxxxxx.  This will take the pressure off the money market for a few weeks in this coming xxxxxxxx. Non-subscribers, click here for access.

But supply pressure will explode in xxxxxxx because the xxx xxxxxxxx xxxxxxx xxxxxx xxxxxx that month, while at the same time tax revenue xxxxxxxxx xxxxxxxxx xxxxxxxxx xxxxxx xxxxxxpoints of the year. The government’s cash need will soar, and so will its short term borrowing. At that point the markets are very likely to crash again. Non-subscribers, click here for access.

I say again, because the supply demand imbalance in the financial markets between now and xxxxx xxxxxxxxx xxxxxxxxx xxxxxxxx will be the worst it has been in this market. There will be immense pressure on asset prices for the next xxx months. The conditions for a crash are in place. That may force the Fed to act weeks before it gets Fed Funds to a so-called “neutral” rate, which looks like x.x%. A xx and a xx would get us there. Non-subscribers, click here for access.

Surprise, surprise, surprise! This is essentially the consensus outlook. But so what! Non-subscribers, click here for access.

The destruction of stock and bond prices will be epic by the time this rate path is complete in January.  Might that be enough for the Fed’s resolve to crack before they’ve gotten to x.x%? Of course. Or might the Fed hold out until that x.x% rate is reached? Sure. We just don’t know. Non-subscribers, click here for access.

But remember, the Fed merely follows market interest rates, such as on the 13 week T-bill. That rate is merely a meter of just how tight the money market supply-demand balance is. And it is the imbalance of supply of securities over effective demand for them that causes falling prices, and their mirror, rising short term rates and bond yields. Non-subscribers, click here for access.

The dynamic of prices trending lower WILL NOT CHANGE until the Fed reverses from QT, back to QE. And it must do so in enough size to once again absorb most Treasury issuance as it did during the 12 years of the bull markets. Non-subscribers, click here for access.

Anything less than aggressive QE will not end the bear markets in stocks and bonds. It may alter their courses. It will generate rallies on the bear market slope of hope. But it will not end the bear markets. That would take a massive policy reversal by the Fed. Non-subscribers, click here for access.

The other thing to keep in mind is that it will do us absolutely no good to anticipate this so called Fed “pivot.” Markets turn on money flows. The bear market will end when the Fed supplies enough money to end it. Any speculation on when it will end, even if the guess is correct, will hold no advantage whatsoever. What’s the point of being early? Non-subscribers, click here for access.

Buy the markets when the monetary facts change. Not before. Non-subscribers, click here for access. 

Simple, direct, obvious.

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Posted in 1 - Liquidity Trader- Money Trends, Fed, Central Bank and Banking Macro Liquidity
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