We Have a Liquidity & Recession Problem On Our Hands

TL;DR

The Fed wants the stock market and home prices to go down in order to achieve their inflation target.

Transcript

they want the stock market to go down they want home prices to go down why because there's not a snowball's chance in hell they're going to get to their two percent Holy Grail consumer inflation without there being a period now of asset deflation it is 100 necessary the recession in their view the aggregate supply curve is sclerotic uh they're not ... Read More

Key Insights

• 🙈 The Fed sees asset deflation as necessary for achieving their inflation target.
• 🫵 The current bear market in commodities and the stock market supports the view of an impending recession.
• 👪 Home prices need to come down for the Fed to achieve their inflation target.
• 🥺 The Fed's tightening policy has had a significant impact on the market, but it remains to be seen if it will lead to a liquidity problem.
• 🍗 The Fed is concerned about the impact of their actions on wages and is trying to create conditions for labor market slack.
• 🏍️ The potential default cycle and diminishing availability of capital could trigger a financial spasm.

Questions & Answers

Q: Why does the Fed want asset deflation?

The Fed believes that asset deflation is necessary to achieve their inflation target of 2%. Without a period of asset deflation, they won't be able to reach their desired consumer inflation level.

Q: How has the Fed's tightening policy impacted the market?

The current bear market in commodities and the 20% drop in the CRB raw Industrials index show that the Fed's tightening policy has had a significant impact on the market. This level of asset deflation is uncommon for a tightening policy.

Q: Will this bear market turn into a liquidity problem?

Historically, bear markets can lead to liquidity problems because the Fed has drained liquidity to a point where it impairs economic activity. While it hasn't happened yet, if markets become dislocated and a catastrophe occurs, the central bank will step in as the lender of last resort.

Q: Will the market bounce back like in previous liquidity-driven events?

Every cycle is different, but it's important to consider other factors that may impact the market this time. The supply side shocks and rising core inflation rate present new challenges, and the damage inflicted could potentially keep the market down for a significant period.

Summary & Key Takeaways

• The Fed believes that asset deflation is necessary to achieve their inflation target of 2%.

• They are not paying enough attention to the supply curve and the potential consequences of their tightening policy.

• The current bear market in commodities and the stock market supports their view of an impending recession.