A Different Script

I was saying it a few months after the pandemic reared its ugly head, and the money printing machine hit overdrive.

We were paying people more to stay home than to go to work. We were handing out loans that never had to get paid back. The FED went on a junk bond buying spree. The money supply surged like never before.

I mused at the time that if there were no ill affects from unlimited bazooka money, then why stop....

and two years later we are finding out exactly why unlimited monetary policy and massive government handouts aren't healthy over the long term.

The script has changed. We went from Powell having zero concerns about asset prices, to now acknowledging, absent a massive FED response inflation could send our economy back to the 1920s.

Anyone that's see the damage run away inflation can do in Argentina knows that the time is now to slam on the brakes. Imagine in two years seeing your life savings, that used to be enough to buy a house, barely cover the cost of a cup of coffee. That is hyper inflation.

Just like the FED has the tools to stimulate the economy, they can fight inflation. I bet they would rather be fighting inflation than deflation. Which is why they kept their feet on the gas pedal too long.

Take away the punch bowl. Crush asset prices with higher rates until inflation comes down. That is where we are right now. With the FED poised tomorrow for a .75% hike, the largest hike of the century.

The market knows this.

Absent another upswing in prices, we could start dealing with reality of a new interest rate environment. Will it be enough to push the economy into a recession? There is a very good chance of that. A recession with prices rolling over? yes.

I think either way we are already starting to see demand destruction. The question now is, will we see the full rate hike cycle to 3.5% or better on the FED FUNDS rate. Or are market forces already doing the work for the FED. My goodness. 2.75% 30 year mortgage to 6% in 8 months with some .75% of hikes.

We are seeing pruning of a stock market tree that grew way too far way too fast. In the long run it will be healthy. It's clearly going to take some time. And we won't see new record highs for quite a while. No doubt this time it is different. We are in the midst of inflation we haven't seen in most of our lifetimes.

And yet the market knows this already. Most of the tech, growth, money losing names have been in a bear market for some 18 months.

We will see pops and squeezes along the way, but clearly the trend is down, with rips being short lived. The next real strong level of support is the pre-pandemic shutdown highs.

The opening bell nears. I'll have more perspective this week. Have a great Tuesday.

Known to most as Uranium Pinto Beans, Jason has more than 15 years under his belt of trading stocks, options and currencies. His expertise primarily lies in chart analysis, and he has a strong eye for undervalued stock. Because he’s got the ability to identify great risk/reward trades he usually enjoys taking the path less traveled and reaping the benefits from the adventure.

He is a co-founder of Option Millionaires, and he is best known for his weekly webinars with Scott, as well as his high level training webinars and charts found in the forums.

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