Submitted by QTR’s Fringe Finance
It really felt like last week may have been some type of peak hawkishness before a pivot point for the Fed.
However, that doesn’t necessarily mean to me that it is time to go in all in on the stock market. Let me explain how I view things.
CPI data last week came in better than expected, although we all know inflation over 7% is in no way a win, regardless of what the estimates were.
In fact, the data was so “promising” that everybody thought Jerome Powell was going to be extremely dovish in his press conference last Wednesday after Fed minutes were released.
But instead, Powell did the opposite of what he did at the Brookings Institute a couple weeks ago and surprised a market that had rallied on optimistic assumptions by taking a hawkish tone, noting that the neutral rate had likely moved higher and that the FOMC was looking for a “trend” (i.e. more than one CPI data point) and re-committing to the idea of tackling inflation.
This is, of course, what sent markets back lower toward the end of the week last week. In the S&P 500 chart below, you can see the semi-spike after CPI that died on the operating table, and an attempted run up to Powell’s press conference in the expectation that he was going to be dovish. This was followed by the collapse of the market after Powell’s press conference.
As a reminder, my readers know that I don’t really think there’s much at all to be bullish about for the market in general, and I am far more inclined to continue select stock picking and playing defense than I am ready to make the prognostication that the market is once again ready to move higher.
Which brings me to today’s piece: it’s starting to feel to me as though this past week may have really been the beginning of the last chapter of the Fed’s hawkishness. The market remained under pressure at the end of last week because jobs data came in better than expected on Friday (i.e. good jobs numbers) and the Fed is using jobs data as a measuring stick for how well its policy prescriptions are working. It isn’t until the Fed sees softening in the job market (i.e. shitty jobs numbers) that they will consider reversing course.
But the situation in the jobs market isn’t as rock solid as it may look.
The folks over at Zero Hedge, who are almost always one step ahead of everybody, pointed out an anomaly in the jobs market last week when they pointed out that U.S. jobs have been” “overstated” by at least 1.1 million:
…on Dec 13, the Philadelphia Fed published something shocking: as part of the regional Fed’s quarterly reassessment of payrolls in the form of an “early benchmark revision of state payroll employment”, the Philly Fed confirmed what we have been saying since July, namely that US payrolls are overstated by at least 1.1 million, and likely much more!
In the aggregate, 10,500 net new jobs were added during the period rather than the 1,121,500 jobs estimated by the sum of the states; the U.S. CES estimated net growth of 1,047,000 jobs for the period.
“Still think the Fed would be hiking 75bps this summer if instead of an average monthly job gain of 350K, Powell was seeing zero monthly payroll increases?” Zero Hedge asked rhetorically.
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On top of this, we have an upcoming wave of delinquencies about to hit the big board, in my opinion – and delinquency figures spiking will make more of an impact than outstanding credit spiking.
I’ve written over the last month about how the American consumer is 100% tapped out at this point, and it appears defaults are not going to be limited to consumer credit, but also look like they are on their way for the auto market.
The consumer is already stretched, but that hasn’t caught the eye of the Fed yet, who is part of this group of “see no evil, hear no evil” automatons who believe we are on our way to a soft landing. The only thing left to happen now is for delinquencies to tick higher. When that happens, it’ll be undeniable proof to the Fed that a wrench has been thrown into the gears of the economy, despite the fact that we’ve all known this for several months.
And at some point, the “official jobs numbers” are then going to start to reflect the actual ugly state of the job market, as mentioned above. When this happens, it’ll be yet another signal to the Fed that their policies are “working” (read: destroying the economy).
If you combine the jobs numbers and delinquencies with the idea that CPI could be ready to collapse following the money supply (another Zero Hedge credit), you’ll have three giant bricks in a wall of making the case for the Fed to back off its hawkish policy.
On top of that, last week you had the Fed overshooting everyone’s dovish expectations (or undershooting, should I say). If the Fed was acting clinically, this would mean nothing. But there’s a psychological element to what Powell does and I’m going to guess because of this “miss” of expectations, he’s going to be slightly more inclined to ease now than they would have.
Wrapping all of this up with the bow, it feels to me as though we are in the very very late innings of the Fed’s hawkishness. This, of course becomes very true if the market snaps, and eventually breaks, which I think is a real possibility. But even without that, it looks to me as though a pivot is on the horizon within the next quarter.
But as a reminder, this doesn’t necessarily mean it’s gonna be time to go all in and buy stocks for me. In fact, I think this is going to be another trap door situation, wherein the market perceives a pivot to be extremely bullish news but stocks haven’t finished puking yet. This has been my long-standing analysis of the situation over the last couple of months: that the pipe bomb in the plumbing of the economy and the market that we created as a result of accelerated rate hikes has still yet to blow up.
It is only after that time bomb detonates and the Fed pivots and valuations collapse and the market comes in maybe 25-40% from here that I would consider looking to maybe…maybe…think about calling a near term bottom. But as a reminder, I believe that the market still has to fall another 25 to 40% from here. At the least, I still think we need to test our recent lows. I’ve laid out my reasoning for this and noted what I am buying in past articles like this one.
The market and a Fed pivot are two separate things. They do not have to move in tandem. I think the market still needs to crash — yet the confluence of all of the above leads me to believe that we are inching much closer to a Fed pivot than we have been in the last few months. Hell, this has been the first time I’ve really written about it with any type of conviction.
For me, the important thing is going to be remembering that a pivot doesn’t necessarily mean the market has bottomed. On the contrary, it may create another booby trap like positive CPI numbers and dovish Fed minutes have done in the past, where in the market spikes only to puke shortly thereafter.
There is no rule that just because the Fed pivots, the market can’t move significantly lower. As my friend, Jim Chanos reminded his readers on Twitter a couple weeks ago: “…the Fed ‘pivoted’ a full year before Lehman…”.
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