Doomsday for Stocks Takes Shape

The moment of absolute destruction for financial assets was known in form, but not context. It would come when the Federal Reserve attemped a rate cut or QE and triggered a market decline in response. One possible event is emerging: the Federal Reserve abandons or slows rate hikes citing Ukraine as an excuse.

The direct impact of the USG-Russia standoff is inflationary, via higher oil prices. The proper central bank response to a supply-shock is nothing. Do not hike interest rates to fight price increases caused by a supply-shock. This won't help and will only exacerbate the recession, but at least it will be over quickly. Most definitely do not loosen policy in some misguided attempt at preventing a recession. The result will be a stagflationary recession that will require a depressionary recession as an exit strategy. As long as that last step is avoided, a series of stagflationary recessions will unfold as they did in the 1970s.

Lack of foresight is the glaring hole in the Federal Reserve's policy. They focused on the past, on the bubble they blew in the stock market. They should have been asking, "What happens if we let inflation get out of control and we have to hike into a recession?" "What happens if we have to hike during a stock market crash?" "What happens if another pandemic, a war, or some other event means we have to hike into a recession?"

Stocks are done. If the Fed backs off on rate hikes without inflation coming down first, there will be one final rally, one last chance to get out or get short at a great price.

If I had to guess, crude oil will end the Fed's internal debate very quickly. Crude will be above $100 soon enough, and then it will break out, and then we will get a peak that is followed by a recession than dwarfs 2008, which was barely a recession thanks to QE and stimulus. This time, the next QE and stimulus will unleash real inflation that dooms the stock market. At least until resource-heavy sectors become larger than the technology-heavy sectors.