Omicron is a Bull Trap

Some portion of investors, I'd wager a mix of those who a still being terrorized by govt and media propaganda about SARS2 and bulls who are terrorized by 5 percent pullbacks, have locked on to omicron as the explanation for market weakness. Omicron is a borderline total joke, the virus has mutated into something much closer to a common cold virus, but a huge swathe of the Western world is still terrified. Without omicron the market would be more focused on things like...March rate hike odds now closing in on 60 percent. The bulls' fear was transferred to omicron, thus the bull finds the excuse to buy stocks: the scare is past. Instead of serving as a force for bears, omicron is actually a bullish event as far as the market is concerned.

In the Carboniferous Epoch we were promised abundance for all,

By robbing selected Peter to pay for collective Paul;

But, though we had plenty of money, there was nothing our money could buy,

And the Gods of the Copybook Headings said: "If you don't work you die."

Then the Gods of the Market tumbled, and their smooth-tongued wizards withdrew

And the hearts of the meanest were humbled and began to believe it was true

That All is not Gold that Glitters, and Two and Two make Four

And the Gods of the Copybook Headings limped up to explain it once more.

Very few people in the U.S. markets today have both lived though high inflation and were actively trading or investing in it. The financial markets were far smaller in the 1970s. A few people have studied it, but experience beats study. Maybe high inflation isn't in the cards for a few years, but another large swathe of the market has never experienced a world where the Federal Reserve doesn't come to their rescue on every dip. They have no concept of central bank failure, where an attemped save by a central bank can achieve an even greater collapse (pay attention to Turkey for a possible real-time example).

Nobody alive today has experienced the kind of political incompetence and social fracture taking place across the Western world and concentrated in the United States. Never has a modern Western society been this diverse, this disunited. I expect a major U.S. dollar rally at some point because there's no nation large enough to save economies as large as Japan, China and the EU, but also because there will be no cooperation between the U.S. and China. There will be no deal. The system will break down and since most of the debt is dollar denominated, the collapse of the system is deflationary for the dollar.

Similarly, cooperation within the United States will break down as legitimate populist challengers to the system and the ruling class emerge. The winning move for populists isn't to cooperate and save companies like Google or Wall Street investment banks. It is to let these companies implode, crippling the political-economic structure of the ruling class. When the next crisis comes, when the markets are collapsing again and CEOs are screaming for another bailout, at least half of the nation and possibly an electoral majority will say: "Let it burn." Don't believe it? Right now, Democrats are calling on the Federal Reserve to be more aggressive in fighting inflation because their political survival depends on it.

FT: Democrats push for tougher action on inflation from the Fed

“The Fed needs to start tapering immediately and then they need to raise interest rates. Both those things can be done by March,” Jake Auchincloss, a Democrat from Massachusetts and member of the House of Representatives financial services committee, which oversees monetary policy, told the Financial Times.

Politicians have high time preference. They are worried about the November election. Memes are sticky: if Biden and the Democrats are blamed for inflation, it'll take time for people to remove this association from their mind. Which is to say, if they want to kill the inflation meme, late summer is too late. They need prices down by May or June, and to achieve that, they need a market shock in the first three or four months of 2022.

Incompetence plays out in two ways. Sometimes the incompetent are successful at implementing their bad ideas. Sometimes they are so incompetent they cannot accomplish their goal, and fail in unforseen ways as events spiral out of their control.