The War of Wills Begins

“Truly extraordinary”!

So concludes Mr. Randy Frederick — managing director with the Schwab Center for Financial Research:

If you go up 3% and then you give up half a percent the next day, that’s pretty normal stuff… But having the kind of day we had yesterday and then seeing it 100% reversed within half a day is just truly extraordinary.

Mr. Frederick refers of course to the stock market.

We have rarely witnessed such violent market schizophrenia within so tight a span.

Up 932 points yesterday on the news that the Federal Reserve will limit rate hikes to 50 basis points per try… the Dow Jones closed down 1,063 points today… on the recognition that the Federal Reserve will nonetheless increase rates 50 basis points per try.

That is, investors recovered their senses today — and lost their money.

We hazard a contest of “chicken” is now underway between Mr. Powell and Mr. Market.

The former is chasing down inflation, yet trails by laps and laps. He can only tighten the gap with a series of substantial rate increases.

The latter — Mr. Market — is out to ensure the former never nears his quarry. Mr. Market requires lower rates to keep him going along in the style to which he is accustomed.

He hopes that his tantrums, tantrums like today’s, will place a grand piano upon Powell’s back, that it will slow him.

“Keep it up,” says Mr. Market, “and you are going to bring me down. Is that what you want? Think of the trillions in wealth you’ll destroy. Today is just a warning.”

“I’m out to get control of inflation,” counters Mr. Powell. “Do you have any idea how far behind I am? Get used to it, pal, this is just the beginning. I’m tired of supporting you anyway. You can just go scratching.”

Boastful talk, it is true. But has he the steel to see it through?  Will Mr. Powell blink his eyes… and cave in to Mr. Market?

The answer depends, argues Jim Rickards:

The Fed doesn’t care much about the decline, but it does care if the decline becomes “disorderly”… What would cause the Fed to back off? A market meltdown. If the stock market sells off 5%, which would be over 1,700 points on the Dow, that would not be enough to throw them off. But if it goes down 15%, or over 5,000 points from current levels, that’s a different story. Ben Bernanke actually told me that once.

Today’s decline was manifestly… disorderly. If Mr. Market continues his tumults, perhaps Mr. Powell will blink his eyes.

He has done so before. In 2015 the Federal Reserve embarked upon a rate hike crusade. It imposed nine rate hikes between December 2015 and December 2018.

Mr. Powell kept the business going when he assumed command in February 2018.

During the same stretch, the Federal Reserve chiseled the balance sheet from $4.5 trillion to some $3.7 trillion.

By late 2018, Mr. Market yelled blue murder and took to open rebellion. Stocks plunged 20% within 2½ months.

And then… Mr. Powell blinked his bespectacled eyes… and capitulated.

Mr. Market stared him down. We hazard he will again.

Yet a larger question dangles in the air: How serious are Mr. Powell’s threats to cage inflation?


Brian Maher

Brian Maher
Managing Editor, The Daily Reckoning

The Daily Reckoning