Economic Predictions for H2 2022, Part 5: The Everything Bubble Bursts into Pieces
by David Haggith, The Great Recession Blog:
To many economists, saying we are going into an economic crash would be a prediction because over eighty percent of economists do not believe we are even in a recession right now, much less a total economic collapse. To me, on the other hand, saying we’re entering an economic collapse is not a prediction at all. It’s an observation. It’s what is happening all around us, and the hard part is figuring out why they can’t see it.
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I know it’s hard to imagine so many economists could be living in the middle of a recession and not see it, much less something so much worse. It’s hard for me to imagine, too; but, as my last post reported …
72 percent of economists polled expect a recession to begin by the middle of next year including 19 percent of those who said the United States is already in a recession.
“A Recessional for the Recession: Everyone Sings the “Strong Labor Market” Tune in Unison, and They’re All Wrong!
If I’m understanding how the data collectors are working those percentages, only 19% believe, as I do, that we are in a recession now. They’re included among the 72% of economists who believe we are either in a recession or one is coming as late as next year. Excluding that 19% who believe we’re already in a recession, leaves 53% who believe a recession is yet to come and another 28% outside the 72% who don’t even believe we’re heading into a recession down the road, much less that we are already in a great economic collapse.
However, I will not predict we are going to have an economic crash. I am here to say we’re already entering what I am calling “The Great Collapse” or have in the past called “The Epocalypse.” That’s because this recession and its accompanying stock-market crash are only parts of a much broader economic collapse — the bursting of the Everything Bubble, much of which I laid out in earlier Patron Posts. Now, I’m going to lay out the continuing developments for those events of the Great Collapse that I summarized in “An Apocalypse Upon Us: How much more can we take?” and make some more predictions along the way (which I’ll put in red to help them stand out) in this post for everyone.
Scorching inflation isn’t going away for a long time and will continue to kill the stock market and the economy
Before I go into more about those events and make any predictions about them, I need to followup on last year’s main prediction to show how this is developing. That prediction, which became the top story of 2021, was scorching hot inflation. I mention it because not everyone got to see that I took that prediction further in my last Patron Post in this series by stating unequivocally that the topping out of inflation and the appearances of recession everywhere would definitely not bring the relief from Fed tightening the stock market was believing those turns of events gave hope to. In fact, the Fed would realize inflation is going to remain so hot that the foolhardy narrative about a Fed Pivot would hit an abrupt dead end. So, just as many thought the rally had become so strong the bear market had ended, I wrote,
Stocks are at a particularly interesting inflection point. Many see the current rally and have been speculating the onset of recession means the Fed will pivot. I’ve said, “Nonsense.” The Fed will not pivot — not in time to save the stock market. This time is different. In past times, the Fed’s back was not up against the wall due to being pushed forward by inflation….
So, another prediction: the stock market tunnels to a new low before the end of the year and likely begins its longest drop of all, and the Fed does not pivot in time to save it.
“Economic Predictions for H2 2022, Part 3: Battle of the New Currency Competitors“
I didn’t even get to writing the next Patron Post in this prediction series because of intervening topics to write about before we saw all hopes of the pivot fall and the stock market fall with it. We, of course, have yet to see if the market hits a new low or if this becomes its longest drop in this bear market.
To put the seriousness of this inflation that appears to have topped out in perspective with what we experienced in the seventies, John Williams of Shadowstats says that, if inflation were measured by the same formulae used in the seventies, today’s inflation would be about 17%.
In the first post of this series, I laid what has already born out as follows: (It’s important to note so you see the cause-and-effect between all these events and have that basis for confidence in the rest of the predictions.)
Inflation will keep the Fed engaged in firefighting all year
Inflation remains the driving economic event that will dominate the economy, crush markets and bewilder the Fed and befuddle stock investors for the remainder of this year and into next year….
Investors are now beguiled by their belief in a Fed that had the liberty to stimulate the economy whenever it wanted to with nearly infinite money. They have not fully accepted the fact that the Fed no longer has that luxury, so they keep returning to peculiar belief that bad news is good news because it means the Fed will pivot and come to the rescue. It will not.
“Economic Predictions for H2 2022, Part 1: This is not Your Father’s Inflation“
You can see this has been a consistent theme in this series right from the start. At this point it’s become news that appears to have been accepted by nearly all financial writers that Papa Powell could not have made it more clear that the Fed is still on a crash course to kill inflation at any cost, and that is why the bear-market rally (the bull trap) is over and stocks are falling again with the knowledge this time that they do so without a safety net. In fact, over 2,100 CEOs are selling off their own stocks in their own company. Might they not know something the non-insider’s don’t? (Of course, they would never made insider trades…. Or would they?)
Anyway, the pivot’s past, the rally’s over:
The stock market’s summer rally was cut short last month as investors digested a reaffirmation of the Federal Reserve’s hawkish inflation-fighting stance…. But even after a roughly 9% drop in the S&P 500 since mid-August, Wilson says buyers should (still) beware.
In a Tuesday research note, the CIO noted that his fire and ice moniker has “proven to be an effective way to describe the first half of this year,” and he expects that will continue to be the case through December.
Wilson believes the stock market is set to experience “fire and ice, Part 2” over the coming months after Fed Chair Jerome Powell’s comments at an annual central bank symposium in Jackson Hole, Wyo., last week.
Powell argued some “pain” may be required to get consumer prices under control over the next year, and economists noted that asset prices (including stock prices) will need to fall to achieve that goal.
In that first post of this series, I laid out all the reasons readers could be certain Powell would not pivot and the market would go the way it did as soon as it finally got its head set straight by Powell. More recently I noted that “some pain” is not what you experience when your plane makes a soft landing. So, please note that the soft landing is already off the table according to Powell.
I’m solidly in the same camp as Wilson and have been the entire time inflation was building from clear back when it was just building on the producer side of the economy, and Wilson’s side is this:
While some market pundits and investment advisers made the case that the stock rally was a buying opportunity over the summer, Wilson has contended it was nothing but a trap for investors all along.
His argument was, and is, based on the idea that inflation and the Fed’s attempts to combat it with interest rate hikes act as “fire” against stocks, significantly lowering their valuations. Rising interest rates raise the cost of borrowing for corporations as well, making it more difficult for them to invest in their future growth and turn a profit.
And at the same time, slowing economic growth, or “ice,” is pulling down consumer spending, and by extension corporate earning potential.
Translate that last part “recession.” And not just slowing economic growth, but slowing consumer spending due to prices rising higher and consumers becoming more conservative — a kind of slowing that will continue this winter as heating prices rise (bringing a rise in that component of GDP “growth” that is purely inflation playing through, not an increase in production) while that extra expense for consumers slows spending in many other categories where reduced spending results in an actual reduction in production.
In that first post in this series I said the market’s pivot point of view was ludicrous because the Fed had no choice but to fight inflation because …
the practical things that helped suppress inflation have suddenly vanished like a waterspout that is there and then retracts back into the sky and is gone [and] shortages mean excess money will be used to bid up prices as people and companies compete for the limited availability of things they need….
It all means there are many problems involved in even trying to resolve these shortages — left over trade wars with their tariffs, a world where nations now hate to trade with each other and where politicians would prefer to fight a war with sanctions than with direct involvement of their own militaries, supply chains that broke down due to the Covid lockdowns, and shortages of workers who said, “I’m never coming back.”
With all of that, this is a very complex inflation problem that could easily get much worse. And that is only part of why this inflation is not your father’s inflation, and why it is a greater battle than the Fed can handle….
“Economic Predictions for H2 2022, Part 1: This is not Your Father’s Inflation“
What you heard in Powell’s words and his tone is that the Fed now knows it has a serious battle before it. I had noted numerous pressures that would continue to keep inflation high and could drive it even higher after a bit of a dip and concluded, in terms of the market and its fantasy about the Powell Pivot….
…that is why you know the Fed is going to continue to take the inflation war seriously now that it sees inflation expectations starting to form and will lean on the side of fighting inflation versus the side of saving the stock market or preventing the economy from going into recession….
Having been so wrong about inflation in their public statements, I think it will be a long time before the Fed becomes complacent about inflation again as they see all those forces crowding against them. So, investors salivating for a quick pivot are highly likely to be wrong….The Fed is not going to throw a torch in the tinderbox the second it manages to suffocate the fire [by pivoting back to accommodative interest rates and QE].
It’s important to see all of that to understand where we are in the battle and how much lies ahead. In terms of where inflation goes from here, I said:
Inflation is probably near a peak — or, at least, won’t be rising as fast as it has been since the Fed is now strangling the limited life back out of the economy by raising the cost of financing and reducing the foundations of money supply. Inflation will likely now see ups and downs, rather than a straight climb up, given that the economy is clearly now back in a recession, and recessions create strong deflationary forces.
(See, I told you I’d let all readers know about this once it got to the point where it becomes vital to understanding where we are. Patrons, of course, got the heads up about all of this and all the reasons that would make it understandable and foreseeable before J. Powell came out and made it abundantly clear: NO PIVOT. He repeatedly stated the Fed will stay the course on fighting inflation “until the job is done.” all readers can, at least, now know it was foreseeable, in spite of how so many in the daft stock market and among economists did not see it coming in the slightest. And I hope that strengthens your ability to believe the rest of these predictions, as they will be helpful to you, even if they are of uglier times to come. After all, if you were heavily invested in the stock market, this not-so-cheery perspective would have been of great value, and it still is if your own understanding sees where this is going.)
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