Manipulation to the Max?

I’ve been skeptical of claims the financial markets are manipulated by government. There had been evidence of banks manipulating indexes such as LIBOR, and in precious metals. There’s probably a lot of “legal” manipulation via HFTs frontrunning trades with the help of exchanges. I put legal in quotes because firms claim to be market making or providing liquidity, but market makers used to take risk, while some of these firms seem to never have down days. It'a a big red flag for fraud. Whether legal or not, when this era finally ends, Wall Street and financial markets will be treated similarly to how they were in the New Deal. Today’s heroes will become villains.

Still, until I see smoking gun evidence of fraud, it's an unverified claim. The markets are behaving as expected when there’s a relentless bid from retirement funds being invested in high risk securities through passive index funds, along with an endless bid from speculators who think the Federal Reserve’s number-one job is pumping the stock market.

After the bear market, firms such as Blackrock, Vanguard, Invesco and maybe companies offering 401k menus, the whole investment industry really, could be charged with fraud, criminal negligence and so forth. There won’t be any way to replace two generations of lost retirement savings, but all of these firms can be destroyed and their executives placed in jail. If this ends up being a bigger bust than 1929, expect a bigger response from government even if it is unfair, unjust scapegoating.

However. I saw this claim on Twitter:

If the Federal Reserve is manipulating commodity prices, it is engaged in criminal fraud. Everyone involved is committing criminal acts with no legal protection, only political cover if the current regime OK'd it. It is likely at the behest of the criminal regime in Washington, DC. If this is going on, and this is only a claim on social media, but at this point it wouldn’t shock given how the Federal Reserve has expanded its operations in the past decade. Nor would it shock considering all the criminal and seditious actions being taken by USG.

Widespread criminal activity at the heart of government and the financial system would be precisely the type of rot you’d expect ahead of or during a Fourth Turning. If the public ever move on from Trump, Kennedy and current outsiders, and found itself a real rival elite, and if such a man could win against a criminal regime willing to rig elections, he would become a defacto dictator for the simple reason that arresting most of the ruling class would be step one of any reform effort. Otherwise as with Trump, they would engage in seditious conspiracies to thwart any reform.

Moreover, they are building an authoritarian, fascist system fusing government power with corporate operations. The government is the iron hand of tyranny, corporations the velvet glove that carries out what is still currently illegal for government. It's like a turnkey operation for a would-be Pinochet.

The government doesn’t openly use all its powers because it would be unpopular at this stage. Probably not as unpopular as it should be. About a third of the country seems to be on board with fascism as long as it's against their enemies. When the depression is in full swing though, and if the public revolts for real, they will cheer a President who makes full use of the national security state against the current ruling class. He can use military tribunals to wipe them out, and his face will be added to Mount Rushmore. Such is the scale of coming events. That, or the bad guys win and consolidate power. They are already using state power against political enemies and jailing supporters of rival politicians. If they keep going, the USA turns into something like modern China with permanently manipulated markets with a fig leaf of private ownership and rigged elections acting as the veneer for a totalitarian state.

Bear Rally Over? Yield Curve and VIX Turn Higher

It has been a long and winding road in this bear market. Yes, I still believe a bear markert is underway until new highs are made. I haven't been tactically bearish on the market over the preceding months, onyl taking some small swings when setups looked good. Until those old highs are taken out, my bear market call from November 2021 remains intact.

First, the classic bubble chart pattern hasn't been violated:

A double-top is a valid expression of the "return to normal" phase. Bullish sentiment and speculative behavior return to near peak levels, propelling the major indexes or stocks into double-tops. Anecdotal, but cryptocurrency speculators believe a new bull market is underway. Bitcoin BTC has a pattern that is consistent with the classic top though:

Tesla, Google, Amazon and Meta all sport the classic pattern with no hint of an imminent double-top. The paradox stocks are Apple and Microsoft. Both have achieved new all-time highs. Their massive weight in the S&P 500 technology sector (nearing 50 percent at times) propelled that sector to a new all-time high in July. If I'm correct in my assessment, this will turn into an overthrow of a double-top pattern and not an extension of the bull market.

Industrials also achieved new all-time highs this year. Energy and materials made new highs in the second-quarter of 2022 and remain within striking distance of new highs.

I'll digress here and give the bullish argument over the longer-term. Assume for a moment the U.S. was primed for a recession around the time the coronavirus hit. The government then wrecked the economy and then flooded it with far too much stimulus. Even though there's no official recession in 2023, the U.S. government is running deficits on par with the fallout from 2008:

There's nothing bullish about that chart long-term. Growing deficits will increase inflationary pressure. Falling deficits could trigger deflationary pressure. Since stocks are priced for perfection, deviation out of the Goldilocks Zone will trigger price declines in all sectors at least for a time, barring an explosive move higher in energy as we saw in early 2022.

I don't want to belabor the valuation topic, but here is the price-to-earnings ratio divided by the growth rate (PEG) and the spread between investment grade corporate bonds and the Federal funds rate.

Going back the to the bull thesis: what if the government front-loaded stimulus and the bear market/recession doesn't materialize? In that case, either an extension of the bull unfolds or the transition occurs without the bear move. Both EFA and EEM, the developed and emerging market ETFs, bottomed in October 2022, with EEM having a little overthrow this year:

To wrap up the bull case: the government flooded the economy with stimulus, triggering a temporary inflation surge. Inflation settles back into the Goldilocks Zone, as does GDP growth, sub-2 percent for both. In the short-term bull scenario, stocks enjoy an extension with tech and other speculative assets resuming leadership. In the longer-term scenario, the transition to new leadership such as industrials, energy, commodities and foreign markets takes place without a major bear.

Back to the bear scenario, one of the strongest signals for a recession has been the inverted yield curve. It doesn't indicate an imminent recession, rather it signals the pre-recesesionary stage. The actual recession comes when the yield curve steepens. Going back the past four decades, this has always occurred when the Federal Reserve slashed rates. Right now, the yield curve is steepening because long-term bond yields are rising faster than short-term yields. It is a small move at the moment, but the spread has made a higher low, indicating the final low might be in.

The 10-year treasury yield has a bullish formation that may or may not complete. If it completes, then higher long-term rates will sink financial asset valuation and could indicate a stagflationary recession. The 30-year mortgage would be on its way towards 10 percent, a level that would almost assuredly kill home prices too. On the flip side, a traditional steepening via Fed rate cuts would be another bear market and recession like we've seen in 2000 and 2008.

The decline in the VIX has been a hallmark of this bull market. The VIX has fallen below the level reached at the November 2021 peak, indicating fear is gone. Here's the VIX overlaid with the 2s10s spread:

VIX isn't a great indicator in that it tends to be coincident with the 2s10s, but a rising VIX indicates rising fear, likely because there's bearish action in parts of the market ahead of the full-blown bear. Here's a look at when the VIX bottomed ahed of prior bearish periods:

There will be bearish trades emerging very soon if the yield curve has finished inverting and moved into steepening. Ditto if the VIX follows it higher. With September and October coming up, the calendar supports a market top scenario here. New highs on the major indexes will invalidate the bear scenario, as will a falling VIX. If the 2s10s inverts further or moves sideways, it will indicate no imminent economic pressure. If the 10-year yield fails a breakout for instance, the yield curve might invert further while the broader stock market interprets the falling yield as disinflationary and therefore bullish.

1999 All Over Again?

I started looking at rabbit years because for some reason they have a 12-year pattern of alternating boom-bust, and I've been thinking about how AI is like the 1999 New Economy, and then I looked into the Fed's liquidity pump and...Oops They Did It Again: Fed Repeats 1999

Inflation-Adjusted Possibilities

If the Fed can't or won't stop inflation, the inflation-adjusted losses on the market indexes may erase the entire 40-year bull market. A drop to the 1966 inflation-adjusted DJIA seems like a lock to me in any major bearmarket. It is about a 69 percent loss down to the 1500 area onthe S&P 500, the 2000 and 2007 topping area (I used DJIA for any data before the 1980s because it was the most watched index then), that I think can be hit in nominal terms during a front-loaded bear market. The longer a bear takes to unfold, the more losses will be made up of lost purchasing power. That might sound nuts, but consider the CPI-adjusted low in 1982 matched where the DJIA was in 1947.

The CPI is about 300 right now. What if the CPI hits 500, about 60 percent inflation, over a decade. Multiply the CPI by 30 to get 15,000, matching the inflation-adjusted peak in 1966. Zero inflation-adjusted gains not including dividends. You may point out the dividend gains aren't too shabby and you're right, that's a lot of compounding. However, we are looking ahead. Do you want to suffer that loss while only collecting about 1.6 percent yield on the S&P 500 Index? Also, bonds can compound too. If inflation rises, 10-year treasuries will be paying substantial interest, possibly as much as the 8-percent investment return target many investors and institutions default to.

Game Over

Repo is inverse with XLF, not on XLE.

Financial Stress Like in 2020 and 2008

I covered BXMT a few times last year. It was one of my "crash" targets. It is rolling into crash territory now. Some resistance around, conservatively, $16.50 per share. Below that it can free fall. If that happens, we'll be in a full-blown financial crisis of some degree.

The other side of the market is the Nasdaq. The NQ continues holding up. It needs to break 12000 and not look back for a full-blown bear move to get underway.

The Nasdaq's reslience, really the whole market's, speaks to the still extremely bullish sentiment within the market and the trillions of inflated liquidity sloshing around. The behavior of banks, commodities and so on are now hinting that this money will be deflated and sent to money heaven. Investors can hedge risk of bailouts and supercharged inflation with assets such as gold. Until there is some major pain however, I do not expect the Federal Reserve will go into full bailout mode because it will risk, with signficant probabiity, even higher readings the inflation indexes. If inflation goes up and rates with it, more banks fail. If inflation goes up and the Fed does what they did for SVB Financial, inflation goes higher still and takes down the whole economy. They're trapped and so are all the bulls that aren't hedged.

Unemployment and Stocks

Very simple formula for 2023 in my opinion. If unemployment rises, stocks are going to new lows.

The first chart below shows claims and stocks positively correlated because myopic, QE-addicted bulls think higher unemployment is good for them, because the Fed will ease off hikes.

If unemployment starts rising sharply, then we'll know what form the Black Rabbit will take.

Coppock Curve and Dovish Feds

The Felder Report discussed the Coppock Curve. I can see both a bullish and bearish interpretation. It confirms the 50-month moving average hold being a correction with the Coppock down a little more than in most corrections and similar to the 1987 crash move. It bottomed well after stocks began their rally.

The other chart shows how the bulls interpreted the Fed's pivot in August 2007. A very bullish reaction in September 2007 when another rate cut followed and then the top shortly thereafter.

Most Recessions Start a Year After Steepening

Most recessions start at least a year after the yield curve starts reversing higher. There already was recession in Q1 and Q2. Maybe there isn't now, or maybe inflation is being undercounted. Either way, not a good outlook.

I posted some trades over on the Substack.

Commodities Signal Something Wicked

Preface: I'm all set whichever way the market goes and I'll change positioning as necessary. Even if you're bearish, it makes sense to have real assets, some physical precious metals and you should have a small watchlist of lotto-ticket junior mining stocks in case things change in a hurry.

Commodities exploded higher on Friday. Market participants and more so financial media, always create an explanation for what happened. The story for Friday's move was China re-opening. 

Another explanation is that the money printers take power away from the Federal Reserve. There is a growing rumor that the Treasury Department led by former Fed chair Janet Yellen will seize monetary power. She has floated the idea of doing a "twist" where the treasury issues new debt and buys back older debts. This would squeeze shorts and shock the market in the short-term, though maybe not. First, if this is done, it is the financial equivalent of draining the SPR for votes. How many votes will the Biden administration get for the SPR policy? It looks like a negative number to me. I bet this move is a larger negative number. It wants to "drain" the treasury market of very favorable debt (from the view of the U.S. government) and replace it with more volatile short-term debt that will reset at higher interest rates. As with the SPR drain, they refuse the simple solution: issue less debt. Instead of sending $30 billion to Ukraine, issue $30 billion less in treasuries. What a concept! As with the SPR drain, if the policy fails and the future is worse, then they've screwed the country. Interest on the debt will bring forward the date when massive cuts in welfare and warfare spending will be made.

It's possible the gambit will fail immediately too. In addition to worsening the government's fiscal position, they are crossing a red line by interfering in monetary policy. As someone who opposes central banks for economic and political reasons, it nonetheless is a superior economic arrangement to a U.S. treasury run by literal money printing MMTers. It is possible the market reaction to this treasury move will be a collapse in treasuries, the U.S. dollar and an outbreak of inflation so bad that there are inflation riots in the streets. For this potential risk alone, it is insane for a Democrat administration to effectively take 100 percent responsibility for the nation's fiscal woes built up over generations, but that is what will be the "narrative" if they do it.

The above scenario is a valid explanation for a sustained explosion in commodities of which Friday was merely the start. Another is that for all the whining by degenerate speculators and gamblers, the Federal Reserve still has interest rates at negative 2 percent measured by core CPI. What if I and others who expect lower inflation are wrong? If neutral policy includes rates of positive 2 percent, that argues for an 8 percent Fed funds rate right now. That would mean mortgages above 10 percent. What if the move on Friday was the market calling bullshit on the Fed and inflation is about to rip higher? Say hello to 10 percent on the 10-year and 15 percent yield on mortgages. 

Intuitively it makes sense. There is no hope of a soft landing given the amount of debt-financed stimulus and lockdowns that preceded it. At the very least, the 30 to 50 percent rise in home prices, more than 100 percent in many places, should reverse nearly 100 percent if the inflation comes out. Factor in lockdowns and the economy should be at a lower level than it was in February 2020. There was a great deal of economic destruction carried out by politicians and then hidden by massive stimulus. The electoral guillotine that will drop on Tuesday November 8 is the public reaction to the tip of an iceberg of destruction that the ruling class sent our way in 2020.

Alright, there's your commodities bull case. How about the bear case? First, the Fed gets serious about inflation if the runaway inflation scenario is real. They do whatever it takes to get inflation down, including the hardest landing for stocks since 1929. You will hear screeching like never before if the Fed does an emergency rate hike, but it is the appropriate move if commodities are taking off. Copper is begging for a 100 basis point emerging hike if it has one more day like Friday.

More likely, the big move is the end of a speculative wave. Whenever I'm writing one of these posts, something big usually follows. Markets get to the starting line of a major phase change many times before they go through with the change. If this isn't the phase change yet, then history says Friday was a great shorting opportunity.

Prior spikes in copper, outside of the Ukraine war pop, came at the end of rallies:

Huge spikes in and of themselves can be bearish outside of V-bottom type moves preceding them. If China doesn't unleash massive stimulus and/or the U.S. treasury isn't dumb enough to trash the currency and treasury market, then that spike is unwarranted.

Friday's move still leaves assets such as gold and copper with their crash analogs intact. Gold did pop up, but that candle could still end up looking like April 2013 before the month is out.

Silver had a similar spike with similar volume in the futures market at the start of October.

That also came within the context of a stock rally. Using the the stock market for context and relative weakness in stocks last week, the pop in commodities looks like it could be an outlier move.

As for the broader market, it can be distilled down to one stock: Apple. The stock has a bearish topping pattern that has yet to break. The measured move off the topping pattern gives a target of below $80 per share. There is a gap at $95 per share. If it fell as much as the rest of BigTech, it would trade down around $110 at minimum. Long-term support is around $124 per share. Apple is the largest stock in the S&P 500 Index at more than 7 percent of the index. It is nearly 25 percent of the technology sector. It is 14 percent of the Nasdaq 100. Finally, it broke the AAPL/SPY uptrend ratio. While not a necessarily a trade signal, it does indicate Apple is officially losing its status as the largest company in the stock market. I doubt this will be a painless transition. It is possible Apple collapses alone, but unlikely. 

We'll find out soon enough what the market has in store. One thing I'm relatively certain of: if commodities go up, then stocks like Apple are going to crumble. If commodities reverse lower, it'll probably be for a bad reason that is also bad news for Apple. It's possible both stocks and commodities rally for a time, but I don't see them rising together for long. 

Interest Rates Still Far Too Low

Asset prices are way, way too high. Most of the inflation went into asset prices, not consumer prices.

When Do 100 bps Hikes Enter the Conversation

The past couple of decades have seen increasingly activist central banks intervene in markets. The Federal Reserve helped blow a housing bubble, then an everything bubble that it is now trying to unwind. Previously, they mostly followed the market. A couple of articles worth reading are De-mystifying RBA Setting of Interest Rates by Steve Keen and Here's How to Know When the Fed Might Raise Interest Rates by Vadim Pokhlebkin.

The 3-month Treasury bill rate is a proxy for the Fed funds rate. From the chart below, you can see the Fed funds rate used to fluctuate around the 3-month treasury rate. In the 2000 and 2008 recessions, and again in 2020, the market dropped interest rates faster than the Federal Reserve.

Something different is happening now. The market is raising interest rates faster than the Federal Reserve. If you notice the green line, the market takes rates up in between meetings and the Fed then catches-up by closing the gap to near zero. Notice the gaps widening? Remember Powell saying 75 bps was off the table? Then it wasn’t. The Federal Reserve is following the market and not vice versa. If the market believed the Federal Reserve and was following it, then the gap between the market rates and Fed funds rate would adhere to Fed policy and jawboning, and not the other way around.

The spread between the market and the Federal Reserve is still widening. The 3-month treasury yield is almost 125 basis points ahead of the Fed funds rate heading into this meeting 114 bps according to FRED). This is a wider gap than existed in June when they switched to 75 basis point rate hikes.

The current gap might not enough for a 100 bps rate hike because it would leave less than a quarter point gap. However, a 75 bps hike will leave the gap at around 39 bps. Notice that will be lower than the gap than at all previous rate hikes. The Fed should hike 100 bps if this chart factors into their decision making. The chart is saying the Fed is not only losing its battle, but that it is in a worse position today than it was at the start of its rate hiking.

With the market currently 50/50 on a 50 bps vs 75 bps hike in December, the Fed can push those odds with a hawkish statement, but they’ll still be behind again in December unless the market slows its pace.

In conclusion, the Federal Reserve is chasing the market higher and, key point, the market is accelerating its rate hikes. The Fed’s 75 bps pace falling behind the market’s pace. The speculators on Fed policy are undecided between 50 bps and 75 bps for December. If the bond market doesn’t slow down or worse, continues accelerating, 100 bps hikes might be on the table.

Projection? Wall Street Says Bears Hoping for a Fall

ZH: JPM: Wishing This Market Lower Is As Frustrating As Holding A Beach Ball Under Water

The above is a premium post at ZeroHedge, but comes on the heels of a relentless string of very bullish calls from all over finance. Not only are bulls bullish, but bears also are talking about a melt-up. This JPM headline makes me wonder if Wall Street isn't trying to dump as much as possible though. I can only speak for myself, but I don't hope the market will drop. I get that there are technical rallies. What I do not see here, is how the bond market rallies on a Fed pause or pivot when all signs I've seen from financial markets tells me commodities such as crude will rip higher if that happens. Additionally, I'm seeing gold behave like it maybe wants to crash afterall. Shouldn't it rip higher on a pause or pivot, since logically that would mean future real interest rates will drop? Real rates will rise if inflation falls and the Fed holds the line, but if that level of real rates is priced in, a pause or pivot should cause a bullish repricing of gold.

Stepping back a bit, about the only market "signaling" a pivot is the most solipsitic one: stocks.

Anything can happen in markets. Anything. Maybe bears are focusing on gold and copper instead of stocks because of the strength in stocks. Maybe bulls are focused on stocks and that's causing a divergence. Maybe bulls are right and the Fed will pivot or Powell will touch his face in a way that means stocks go up 10 percent. Sentiment is funny, that's why you have to pay attention to how stocks react on news items. The market is clearly in a very bullish and optimistic mood at the moment. I look out over the coming months and even years, and do not see how the Fed pivots or pauses. If anything, I expect the opposite. If they ease too early, they'll blow it the same way the 1970s Fed did. The risk of stagflation would climb. Bonds would eventually reject the pivot and sell off, forcing the Fed to chase the market interest rates.

In the 1970s the Fed cut rates midway through the recessions and that was the wrong move. Not repeating would mean the Fed hikes rates until a recession is evident (the recesion will likely be backdated) and then refuses any rate cuts or moves very slowly such that rates are still high at the end of the recession.

To sum it up, I don't hope for a fall. I don't see how it can rise for very long and if it rises, then it's more profit for the bears on the eventual downswing.

Weak Knees

Watching the market overnight and it’s drifting back up. I don’t put much stock in the overnight moves because they frequently reverse, but I’m not bearish short-term if the market goes to a new rally high. The bull trap scenarios I laid out will be in play if the market cracks 3900 and goes for 4000 or 4100.

Apple and Amazon earnings will be huge tomorrow after the bell, followed by the PCE report for Q3 before the open on Friday. Harking back to those bull traps, the Cleveland Fed has the September PCE numbers coming in lower than expected. That will be crack for bulls if Amazon and Apple can merely avoid a “Meta” scenario with their earnings reports. Bulls will not care if October inflation numbers are worse and a weak dollar lifts the inflation rate. They'll enjoy a few days of rampage before the Federal Reserve drops the hammer on November 2.

Best case for bears who have shorted already is that Apple, Amazon or both disappoint and Cleveland Fed is wrong about the PCE. If not, one of the bullish trap scenarios is the best outcome.

Is Powell Playing a Deeper Game?

Is Jerome Powell playing a far deeper game than most realize?

Someone asked about this article where Tom Luongo theorizes the Fed is playing a different game than most realize. Right off the top, I think it is very helpful to come up with these types of theories as thought experiments because they help crystallize interlocking parts of the market. Whether you end up agreeing with it or not, it can be helpful. The trouble with these theories is when they lean too much on conspiratorial thinking and not plain facts. You want to work back from the facts and then ask: how might the power players like to use this situation?

I've given examples before. One, Xi Jinping in China could have allowed a deflationary crash in the economy as a means of eliminating political opponents in the aftermath, since the public is always looking for scapegoats. He can also use a deflationary crash as an excuse for devaluing the Chinese yuan. He can also use the U.S. trade war as an excuse. A perfect retaliation for Biden's move on semiconductors would be letting the yuan drop, something that is inevitable anyway if the dollar continues rising with U.S. interest rates. If WW3 has started, retaliatory tariffs from the U.S. merely pushes along a tit-for-tat economic separation.

Conversely, we can play that same game with the U.S., which is where Luongo goes. The article is worth reading and the DiMartino Booth interview linked within is worth watching. Most of what follows is my riff on his article, as this article doesn't explain his position with much depth so I don't want to attribute things he may not believe.

When They Call For the Bailiff You Know You’re Winning

I haven't read Luongo all along, but my read of it is he's arguing the Fed is fighting against the Great Reset. He sees Truss getting knocked out as an anti-Brexit (can confirm reading all the people who think Britain will now return to the EU) and anti-Federal Reserve move. The Anglos are independent and aligned. He also notes which countries' banks are on the Fed's new commercial repo list: Anglos (he doesn't put it that way) and Japan.

Perhaps this is happening, perhaps not. Socialists love cheap money and any restrictive policy on credit will upset them. Since neosocialists (neoliberals, globalist, whatever) control most of the world's governments, they do not want tight credit policies and high interest rates. As commercial speculators, the Anglos are more comfortable with unleashing the wrecking ball of inflation to screw up their enemies and frenemies for fun and profit.

Another question is whether the U.S. will also exit as reserve currency. I've maintained for what seems like a decade now, that the dollar dies in deflation. All these foreign countries want to inflation. They don't like that the Fed is actually fighting inflation. The $100 trillion question is whether global capital would prefer to sit in socialist serial inflator countries or stay in the United States. The Empire Strikes Back if you know what I mean. It can all be boiled down to China and neverending belief that the yuan will become a reserve currency. Short of winning WW3 against the United States, China is still many decades away. Their capital account is closed! It's shocking that people still think China is in some kind of strong position here. A competitor to the U.S. dollar that is not gold is the Argentine peso in waiting. If gold, then the U.S. will depreciate more slowly versus gold.

The U.S. has already lost the trade war. The American worker is on the bottom looking up. He's being crushed by neoliberals in Washington, Wall Street, China, he's being overrun by migrant labor, he's watched his factories and then his neighborhood get packaged up and sold off to foreigners. Any shakeup in the global order has a high probability of helping the average American worker if only because everything has gone against him. That doesn't mean it will. Things can always get worse. Yet even if the dollar collapse scenario plays out, that would close the American consumer economy to the world because exports would be too expensive. Many products now imported would have to be made in the United States. A massive transfer of wealth from capital to labor would ensue. A massive transfer of employment from China and Germany to the USA. To think this through is to answer the question of whether any other nation wants reserve status. The U.S. has it. The Federal Reserve can gut other central banks like fish with rate hikes if that's their prerogative because whatever they say publicly, almost all the other central banks inflate harder than the USA. Only closely aligned nations that pull their security weight will be safe from retaliatory tariffs if currency devaluations start popping off.

Social mood is also negative and falling. The one out for a rising dollar would be Plaza Accord 2.0, but I've explained why this is impossible before. Social mood means nations will not cooperate. China has said it'll never go along with it. It's a dead story with the current geopolitical situation.

Where Can U.S. Policy Go?

America First was policy until around 1945. Critics of American foreign policy will point out that didn't exactly end, but it's also true that the much of the country was supporting what in hindsight is the American empire because they were confronting global communism. Many people were appalled with U.S. actions against Serbia and Russia in the 1990s. The nationalist, anti-communist mask dropped from the globalist traitors within the U.S. government. USG has been openly and brazenly imperialistic in its foreign policy since then, as well as going to war with domestic opposition. Journalists are in prison. Books are banned. Social media accounts are censored and shutdown. A return to the 1920s, when the United States was still a mostly neutral global commercial power, seems impossible because of this war. It seems like there's no support for it because the political constituency for it is being openly crushed. Whether Powell is consciously or unconsciously driving policy in that direction, I cannot say, but he sure could go a long way to giving outsiders a chance at power.

None of this is to say things can't go poorly. The U.S. government can print up treasury bills. Another election like 2020 could unleash double-digit CPIs. I'd expect the Federal Reserve would be all but captured at that point, with any idea of inflation-fighting rate hikes going out the window. The general intelligence of the ruling class is going downhill at high speed with Kool-Aid drinkers replacing the mercenaries who instituted identity politics. Competent people implementing evil policies are retiring and the rising generation actually believe in the evil ideas such as white privilege. To say nothing of their near total ignorance of math, economics and physics. The wheels can certainly fall off if the value of the U.S. dollar collapses after socialist economic policies are passed.

Conversely, whether he cares or not, Powell dropping a deflationary bomb (disinflationary if you like) on credit markets is going to damage the outlook for socialism. People say the U.S. is bankrupt at 5 percent or 7 percent interest, but this isn't true. They say that because they take it as a given that U.S. economic growth will slow and that the government will never cut welfare and warfare spending. high interest rates will be expensive for the imperialist USA and could push it into a fiscal crisis, but it'll be a different story for a nationalist government. The debt will become a budgetary weapon that some have always dreamed it could be. The U.S. government is far too large and spends way too much money. If high interest rates instead force a political shift to economic nationalism that tears the welfare-warfare state down, then the U.S. not only won't go bust, but it'll enjoy high inflation via a rapidly growing economy with wage inflation assuming tariffs and nationalist development are part of the package.

Many predicted the U.S. dollar would crash when China started dumping treasuries, and instead the opposite happened because China was dumping to defend the yuan. The new common wisdom predicts high interest rates and an eventually lower U.S. dollar will wreck the U.S. Instead, it could power a rebirth of the U.S. domestic economy, rising wages, high nominal GDP growth and shrink the government's footprint in the economy. It depends in part on whether its done intentionally. It depends on who is in power. Is it a flailing incompetent government or a Machiavellian one that uses great turmoil to reshape the future? Will the Machiavellians be globalists or nationalists? Never let a crisis go to waste as they say. Whether Powell is kicking off that domino I doubt it, but it doesn't mean he isn't kicking it over accidentally.

Going back to Luongo's piece, one of the most important points is that the Federal Reserve will not pivot. I've said I could see them pausing and stock market bulls treating it a pivot, but looking at stocks and crude oil lately, I'm not sure they can pause anymore. The market is still extremely bullish, sentiment indicators be damned. For investors, that's the main point. The Fed will disappoint financial markets and global central banks alike until something really major breaks. Everything else is downstream of that.

We Have a Ding

ZB hit my measured move target today, based off the non-lockdown peak. On many charts, but not all, I ignore both the March 2020 panic move and also for commodities, the Russian war spike. These can't be wholly discounted, but since they were such brief moves, I treat them as low information unless they fit into a pattern. One way it could fit in would be a mirror spike down in market panic. That would take ZB down to the 113 area.

A similar move in TLT would take it to the $90 area.

I have talked about that target before. Here on August 31:

With the caveat, if bonds continue lower, a breakdown in ZB and breakout in 30-year yield correlates with about 5 percent interest. That isn't a crazy target when considering the Federal Reserve is talking about a 4-percent Fed Funds rate. I do expect deflation and a rally in long bonds, but if I'm wrong, it isn't a wild target. It would take ZB and TLT back to 2007 levels of around 110 and $90 per share. Note that TLT is dividend adjusted, remove that and you will see TLT at $90 when the yield was around 5 percent.

I'll also not that the new buzzword from Fed watchers is a 5 percent Fed funds rate.

Oops the Fed Did It Again

The best analogs are more than simply a price pattern.

Atlanta Fed Hikes Forecast Again

Now up to 2.9 percent growth.

Huge PPI Miss

Markets are calm after a huge PPI miss (in my opinion). I expected PPI would come in cool because of falling commodity prices, and thereby set-up a strong rally into tomorrow's CPI report that would either fail miserably or trigger a melt-up squeeze before giving way to new lows. There is still a risk of a cooler CPI for bears, but the odds of that are lower following the PPI.

ZH: Food Cost Jump Sparks Hotter Than Expected US Producer Price Inflation

Ex-Food, Energy, & Trade, PPI rose 0.4% MoM (double the expected +0.2%).

Both Goods and Services PPI are rising with Food increases dominating...

Finally, we note that the pipeline of PPI pain is easing further as intermediate goods inflation eased further...

Inflation is cooling for sure and monetary effects are lagging. Yet remember what Powell said this summer (paraphrasing), "We don't really know anything about inflation..." Yesterday, this article went viral on finanacial social media: Fed’s Inflation Fight Has Some Economists Fearing an Unnecessarily Deep Downturn

Traditionally, the Fed set policy based on forecasts of inflation, which lags behind changes in output. But officials now are reacting more to the latest inflation data “because they have absolutely zero confidence in their ability to forecast inflation,” said Nathan Sheets, chief global economist at Citigroup. He said he is concerned the Fed will overdo rate rises but concedes inflation in the service sector is “pretty concerning.”

I don't see how a central bank cannot overdo it when fighting inflation because it is the only way to be sure. They have to nuke inflation from orbit. The added factor is that they don't trust their inflation forecasts. Every month that doesn't show collapsing inflation is a month that doesn't cause any doubt about rate hikes at the Fed.

My scenario for this year is that inflation does cool, but then accelerates in 2023. Another scenario that will take longer to develop: the market sinks even as inflation drops because the Fed won't change course. Real interest rates will accelerate via falling inflation. Assume the Fed pauses at 4.75 percent. If CPI falls from 6 perecnt to 3 percent, real interest rates rise from -1.25 percent to +1.75 percent. In bear markets, all macro scenarios result in lower stock prices.

Not much has changed with charts the past few days. Some charts remain important such as USDCNY because I still expect a possible yuan depreciation, but that's not chart-centric. Instead, ZB looks the most compelling because it is sitting near the 52-week low. It is also coming within spitting distance of the measured move off the topping pattern (yellow horizontals indicate the top and the target). Note I am ignoring the March 2020 spike when measuring the top.

I've been wrong about ZB, TLT and government bonds finally catching a bid as the market drops. However, if there is a capitulation drop coming this month, then I envision ZB making a quick drop to around 121 before recovering, but equities continue falling. This "safe haven" behavior will indicate equity investors are finally capitulating and also turning to the "safety" of bonds. Safety in quotes because this year has shown they are not safe. The shift in psychology will be investors deciding bonds are safer than stocks. 

If I'm wrong, so be it. I have no position on TLT at the moment. I will also note TLT broke my lifetime support line. It's also possible a twin crash happens in stocks and bonds simultaneously.