Down, Down, Down in a Burning Ring of Fire

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by David Haggith, The Great Recession Blog:

The Dow plunged 686 points midday on Thursday and closed down 458, wiping out a large relief rally from the day before, and it went down for the key reason I laid out for understanding why the Fed will over-tighten and drive the economy into an extremely deep recession.

A batch of economic data that reinforced expectations the Federal Reserve will continue with its aggressive pace of rate hikes set the tone, analysts said, while a sharp selloff across tech-related shares amplified the damage.

The latest update to second-quarter GDP figures confirmed that the U.S. economy shrank at an annualized clip of 0.6% in the second quarter. However, a weekly report on U.S. jobless benefit claims revealed that the number of Americans initially applying for unemployment benefits fell by 16,000 to 193,000 in the week ended Sept. 24, the lowest level since April. 

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The jobless claims data helped to weigh on stocks by emboldening a view that the Fed will stick with its plans to continue raising interest rates.

Morningstar

So, the economy is solidly confirmed as receding for two consecutive quarters — the normal definition of a recession — but the Fed and everyone who follows the Fed does not believe the economy is already in a recession because the jobs market appears so tight that it has them convinced it is a very healthy labor market. As I wrote last week, nothing could be further from the truth. (See: “Everyone Sings the ‘Strong Labor Market’ Tune in Unison as the Band Plays on, and They’re All DEAD Wrong!“) It is actually a broken labor market that cannot deliver labor to meet even substandard production levels, thus dooming the economy to lower production for a long time to come.

Exemplifying this enormously and dangerously misguide belief, one expert concluded yesterday,

“I think we’ll see rates continue to increase here in the US, since we’re not yet in restrictive territory, and that rate cuts won’t come as easily or as soon as the market expects,” Michael Wang, CEO and founder of Prometheus Alternative Investments, told MarketWatch.

He’s dead right that rate cuts will not come easily or soon because the Fed, and everyone who follows the Fed, believes the Fed is not yet in restrictive territory (just as this guy exemplifies) because they think the labor market is tight due to a strong economy. That Patron Post that I released to everyone last week is the most important thing you can understand for realizing why the Fed is going to drive us deeper into a recession that is already more than half a year long.

This will be one of the biggest blunders the Fed has ever made. The Fed is pounding the stock market’s head (and all markets) into the ground at a time when the economy is extremely damaged, but the Fed mistakenly believes the economy is strong due its critical misunderstanding of what is happening in the labor market, and Thursday’s market moves and commentary perfectly demonstrate that playing out. If you read nothing else on this site, read that article. The Fed believes it needs to take some wind out of the labor market to cool it off when the labor market is literally dying.

How bad was it?

The plunge in the Dow was bad enough to finally deliver the Dow into a bear market. It has fallen 20% since its last high in January, taking us to where all the major indices are finally in agreement that we are in a bear market. That leaves no hint of room left for saying we are not. We are, in fact, very close in both the Dow and S&P to taking out the entire market gain since just before the Coronacrash.

Tech stocks, long the market leaders took the hardest pounding with Apple leading the way down — almost 5% — when it was downgraded from “buy” to “neutral” by Bank of America.

Megacap tech stocks got hit hard after Apple was delivered an extraordinarily rare downgrade by Bank of America. The downgrade emphasized the risk of weaker services and product demand given the current macro environment,” said Edward Moya, senior market analyst at Oanda, in a note.

Facebook/Meta also plunged almost 4% for similar reasons as well as their own bad ideas:

Meta’s outlook is in shambles as they are looking at a terrible macro backdrop that will lead to falling ad rev and a Metaverse bet that does not seem like it will pan out,” Moya said.

Due to fantasies about a Fed pivot, which the Fed eventually put solidly to rest,

The stock market had a promising start to the quarter, soaring in July. But fears about inflation, rate hikes, rising bond yields and recession returned with a vengeance in August and September.

CNN

So, we are back to a lower point than where we started the quarter, making this the third quarter in a row this year to end further down, just as has been the case with GDP and will soon prove to be again. The market is ultimately being forced to dealing with the economy — the real economy as measured in terms of inflation-adjusted production, not the baloney economy that is being perceived from very misleading jobs numbers.

Bonds deep in bondage

Bonds are also crashing into a bear market as the Everything Bubble goes down, which I’ve said would be the news of this year, pounded home all the way by inflation and forced Fed tightening to battle that inflation.

It’s not just stocks that have tumbled. It’s the bear market for just about everything. There have been few places for investors to run and hide this year. Bond yields have surged, which means that prices are down. That weighs on returns.

Bonds are supposed to be safe havens during times of market and economic volatility. But two popular, widely held bond funds, the Vanguard Total Bond Market Index Fund ETF and iShares Core U.S. Aggregate Bond ETF, are both down nearly 16% in 2022.

CNN

Bond fund investors may have known that 2022 wasn’t going to be pretty, but the losses they are facing this year are still striking.

The declines across fixed-income funds were extended in recent weeks after the August Consumer Price Index report came in hotter than expected, and the Federal Reserve followed up with an unprecedented third straight 0.75-percentage-point increase in the federal-funds rate.

This has added up to big losses for investors. For example, the largest U.S. bond fund strategy, the $514.5 billion Vanguard Total Bond Market Index (VBMFX) is down 12.12% through Sept. 13, putting it on track for its worst year since its inception in 1986.

In fact, 2022 may be on its way to the record books for more than just the size of the losses. This could be the first time on record that all types of bond funds have declined together in the same year. Every one of Morningstar’s 20 taxable bond categories is in negative territory for the year through Sept. 13. The last time losses were so widespread was in 2008….

It’s been the most volatile bond market going back to the ’90s,” says Morningstar senior manager research analyst Peter Marchese.

Morningstar

And, of course, all of this is happening due to the Fed raising interest rates and rolling off the bonds it owns so those who financed with those bonds (such as particularly the federal government) have to find refinancing elsewhere (quantitative tightening). QT this month steps up to the fastest pace of bond rolloff the Fed has ever attempted. I assure you, it won’t be pretty. It already isn’t, but the Fed is staying its course because of its misreading of the labor market:

With the labor market tight and inflation stubbornly high, the Fed has signaled that it’s inclined to keep raising rates into next year.

In fact, all markets are crashing just as the Fed begins tightening harder as it moves into its full-velocity QT regime, which means there couldn’t be a harder time to go into QT overdrive:

Think gold is a good place to ride out the storm? The price of the yellow metal is down 10% this year. And forget about cryptocurrencies. Bitcoin prices have fallen off a cliff, plummeting nearly 60% in 2022.

CNN

This is the crash of the Everything Bubble. Nothing is holding up, and don’t even think gold is helping anyone against inflation. After you sell it for a 10% loss this year, the dollars you get back are also worth 8% less due to inflation. So, you lose on the value of the gold and on the cost of inflation, as with other assets. You’re getting back 10% fewer dollars and those you get back are also worth 8% less. That is the insidious evil of inflation. It erodes your investments from the underside.

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