The War of Wills Begins

Will Powell Blink First? Were you forwarded this email? [Sign-up to The Daily Reckoning here.]( [Unsubscribe]( [Daily Reckoning] The War of Wills Begins - “Truly extraordinary!”… - The staring contest begins between Mr. Powell and Mr. Market… - Then Jeffrey Tucker shows you why yesterday’s rate hike was merely a “head fake” by the Fed… Recommended Link [The No. 1 Crypto Of 2022 Is Poised To Be Even Bigger Than NFTs, Blockchain, Or Bitcoin?]( If you act fast, you can get in before everyone else catches on. [Click Here For More Details]( Annapolis, Maryland May 5, 2022 [Brian Maher]Dear Reader, “Truly extraordinary”! So concludes Mr. Randy Frederick — managing director with the Schwab Center for Financial Research: If you go up 3% and then you give up half a percent the next day, that’s pretty normal stuff... But having the kind of day we had yesterday and then seeing it 100% reversed within half a day is just truly extraordinary. Mr. Frederick refers of course to the stock market. We have rarely witnessed such violent market schizophrenia within so tight a span. Up 932 points yesterday on the news that the Federal Reserve will limit rate hikes to 50 basis points per try… the Dow Jones closed down 1,063 points today… on the recognition that the Federal Reserve will nonetheless increase rates 50 basis points per try. That is, investors recovered their senses today — and lost their money. We hazard a contest of “chicken” is now underway between Mr. Powell and Mr. Market. The former is chasing down inflation, yet trails by laps and laps. He can only tighten the gap with a series of substantial rate increases. The latter — Mr. Market — is out to ensure the former never nears his quarry. Mr. Market requires lower rates to keep him going along in the style to which he is accustomed. He hopes that his tantrums, tantrums like today’s, will place a grand piano upon Powell’s back, that it will slow him. “Keep it up,” says Mr. Market, “and you are going to bring me down. Is that what you want? Think of the trillions in wealth you’ll destroy. Today is just a warning.” “I’m out to get control of inflation,” counters Mr. Powell. “Do you have any idea how far behind I am? Get used to it, pal, this is just the beginning. I’m tired of supporting you anyway. You can just go scratching.” Boastful talk, it is true. But has he the steel to see it through? Will Mr. Powell blink his eyes… and cave in to Mr. Market? The answer depends, argues Jim Rickards: The Fed doesn't care much about the decline, but it does care if the decline becomes "disorderly"... What would cause the Fed to back off? A market meltdown. If the stock market sells off 5%, which would be over 1,700 points on the Dow, that would not be enough to throw them off. But if it goes down 15%, or over 5,000 points from current levels, that’s a different story. Ben Bernanke actually told me that once. Today’s decline was manifestly… disorderly. If Mr. Market continues his tumults, perhaps Mr. Powell will blink his eyes. He has done so before. In 2015 the Federal Reserve embarked upon a rate hike crusade. It imposed nine rate hikes between December 2015 and December 2018. Mr. Powell kept the business going when he assumed command in February 2018. During the same stretch, the Federal Reserve chiseled the balance sheet from $4.5 trillion to some $3.7 trillion. By late 2018, Mr. Market yelled blue murder and took to open rebellion. Stocks plunged 20% within 2½ months. And then… Mr. Powell blinked his bespectacled eyes… and capitulated. Mr. Market stared him down. We hazard he will again. Yet a larger question dangles in the air: How serious are Mr. Powell’s threats to cage inflation? Below, Jeffrey Tucker argues they are not serious at all. He believes yesterday’s rate hike was merely a “head fake.” Read on. Regards, [Brian Maher] Brian Maher Managing Editor, The Daily Reckoning Editor’s note: “The Dow is up 900 points! What CRASH warning?” That’s how one reader responded yesterday to Jim Rickards’ [market warning.]( But today showed that Jim’s thesis is intact, as the Dow was down more than 1,000 points. Jim’s [Crisis Unfolding Briefing]( breaks it all down for you. We strongly advise you take a look if you want to be prepared for what’s likely coming next. [Click here for more...]( [Click here now for Jim’s Emergency Zoom Briefing.]( Recommended Link [Stunning New Prediction for 2022]( You’re going to want to see this — America’s #1 futurist just came out with a stunning new prediction for what could happen in 2022. And surprise, it’s got nothing to do with Trump. Or trade wars. Or the ongoing gyrations on Wall Street. In fact, this could be your one chance to ignore all that upsetting “fake news” … and get back to the business of getting exceedingly rich instead. [Click Here Now]( The Daily Reckoning Presents: The Fed has chosen to accept inflation rather than recession… ****************************** The Fed’s Head Fake By Jeffrey Tucker [Jeffrey Tucker]Anyone paying close attention could have seen this ahead of time. The supposedly massive crackdown on inflation, with the unleashing of the hawks, turned into a nonevent. Rates are now in historically low territory, once you factor inflation, which is running at 11% according to real-time data. That means that the Fed has done almost nothing so far. Fed chairman Jerome Powell said as much in his post-crackdown press conference. He believes that inflation is going away on its own. The economy is healing and he doesn’t expect that the GDP numbers are going to be worse; quite the contrary. Which is to say that the Fed has decided not to go full Volcker, despite months of signaling that it would do so. All of which is to say that the Fed has already made a specific policy choice. It favors inflation over recession. Period. This is why President Biden laughed so uproariously at the joke made at the White House Correspondents Dinner. It’s become quite the fashion in the highest circles to regard anyone who complains about inflation to be a member of the mouth-breathing MAGA tribe and unworthy of any policy influence in Washington. An almost identical situation is taking place in the U.K. The central bank is only pretending to fight inflation. These tiny efforts are nearly pointless compared with the scale of the problem. And yet bond markets are reacting very strongly to them. It’s like taking away a bit of heroin: For the addict, it’s a moment of panic. Already we have strong increases in 30-year mortgage rates. [IMG 1] But compared with the previous bout of high inflation in the late 1970s, 5.25% is rock bottom. There was a moment back then when buyers were paying +16%. [IMG 2] The conclusion is that we have a very long way to travel before we get anywhere close to reality. To live in a world of dramatically negative interest rates reveals that the Fed hasn’t even begun seriously to fight inflation. The reaction of the financial markets was as wild as election night 2020. The initial response was elation, based on the view that Powell was not serious and would keep the monetary drugs flowing so as to avoid recession. After a good night’s sleep, the fear emotion came back: what if the recession happens anyway? Prices collapsed. The Wall Street Journal cobbled together a story. By Thursday, investor optimism had begun to wane. Even with a larger interest-rate increase off the table in the coming months, investors are still facing the most aggressive tightening of U.S. monetary policy since 2000—the last time the central bank last raised rates by a half-point. Many investors are now questioning how high the Fed might raise rates over the next two years amid soaring inflation and how that might ripple across the economy and corporate profits. Translation: even a slight change in monetary policy could cause what is called a hard landing. Interestingly, Powell’s reassurances that inflation is going away on its own and the economy will avoid a recession came to mean next to nothing. This really is a situation we’ve not seen in generations: the Chairman of the Fed has about as much credibility as the head of the CDC. No one trusts authority anymore, not even the fanciest of the fancy. Gone are the days of worshipful adoration of Greenspan. Now these guys are ever more seen as nothing but propagandists. Recommended Link [Donald Trump — a Silicon Valley HERO?]( [Read more here...]( What if Trump recently did something that could see him become a HERO in Silicon Valley? According to the man dubbed “The Tech Prophet” by Forbes, it’s true. A single Federal Ruling in the final year of Trump’s presidency could be about to unleash a tech revolution worth an estimated $15.1 trillion. In the words of one tech insider – a CEO who works closely with Microsoft, Intel and Google – it “will rewrite the rules of what is possible.” And it could create countless ways for you to grow your wealth. [Get The Full Story Here]( Friends have lately begun asking huge philosophical questions, like: “why don’t humans learn from history?” I suppose the answer is that we haven’t yet invented a technology to upload the lessons of the past to the current generation. That’s the greatest failing of the human experience. It means that we keep having to learn the same lessons over again, along with all the attendant pain that the process implies. That brief foray into the philosophy of history is the headway to this extremely weird announcement from the Biden administration that followed directly on the heels of the alleged Fed tightening: The latest proposal to modernize rules for the 1977 Community Reinvestment Act is set to be announced Thursday and aims to ensure lending to lower-income individuals and small businesses is distributed more evenly where banks do business. Existing rules focus on bank activities around their physical branches. Those rules are outdated in a world in which much financial activity happens online, both bankers and community advocates say. Historically astute readers know exactly what this means. This very system of forcibly forgoing rational lending standards, in the name of serving the poor, made a mighty contribution to the wild housing bubble that exploded back in 2008. After the collapse, lending standards were tightened by simply reducing the mandates that banks take on vast numbers of high risk borrowers. Now we have the Biden administration attempting to reproduce the SAME CONDITIONS that led to that disaster and do it at the very same time that the Fed is pretending to tighten money and credit. This change in the regulations will mean exactly the opposite. It’s their way of responding to grave warnings from the National Association of Homebuilders, that a crisis is just around the corner. Regulators are responding by saying: don’t worry, we are going to force banks to grant millions of weak-credit borrowers vast new debt, so that the markets will be sustained. The damage of such small changes will become obvious a few years from now. It will be a repeat of exactly where we were before. The crash will once again enlist the Fed in a massive quantitative easing to rescue the overleveraged financial and banking systems to keep them from going belly up. When will rationality return? Not anytime soon. The saving grace of the 2008 crash was that we didn’t have to deal with high price inflation on either the consumer or the producer side. The great worry of the time was the opposite: deflation. This time will be different. Imagine a combination of every crisis of the past (1929, 1979, 1985, 2000, 2008, 2020) all rolled into one. The new normal includes sporadic and seemingly random shortages in essential goods. New moms are complaining all over the country that they simply cannot get baby formula, not at the local grocery store or even at Amazon. You can order it but it will likely be canceled. As for the chip shortage that was supposed to end 18 months ago, it is still with us. The worst thing about all of this: we have all been conditioned to be used to it. Regards, Jeffrey Tucker for The Daily Reckoning Editor’s note: “The Dow is up 900 points! What CRASH warning?” That’s how one reader responded yesterday to Jim Rickards’ [market warning.]( But today showed that Jim’s thesis is intact, as the Dow was down more than 1,000 points. Jim’s [Crisis Unfolding Briefing]( breaks it all down for you. We strongly advise you take a look if you want to be prepared for what’s likely coming next. [Click here for more...]( [Click here now for Jim’s Emergency Zoom Briefing.]( --------------------------------------------------------------- Thank you for reading The Daily Reckoning! We greatly value your questions and comments. Please send all feedback to [feedback@dailyreckoning.com.](mailto:dr@dailyreckoning.com) [Jeffrey Tucker]( is an independent editorial consultant who served as Editorial Director for the American Institute for Economic Research. He is the author of many thousands of articles in the scholarly and popular press and eight books in 5 languages, most recently Liberty or Lockdown. He speaks widely on topics of economics, technology, social philosophy, and culture. Add feedback@dailyreckoning.com to your address book: [Whitelist us]( Additional Articles & Commentary: [Daily Reckoning Website]( Join the conversation! Follow us on social media: [Facebook]( [LinkedIn]( [Twitter]( [RSS Feed]( [YouTube]( The Daily Reckoning is committed to protecting and respecting your privacy. We do not rent or share your email address. By submitting your email address, you consent to Paradigm Press delivering daily email issues and advertisements. To end your Daily Reckoning e-mail subscription and associated external offers sent from The Daily Reckoning, feel free to [unsubscribe here.]( Please read our [Privacy Statement](. For any further comments or concerns please email us at feedback@dailyreckoning.com. 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