The Fed is NOT coming to rescue stocks this time.
For decades, investors have been conditioned to “buy the dip” because the Fed invariably steps in to prop up the stock market whenever a collapse begins in earnest.
The Fed did this throughout 2009-2017, in 2018, and again from 2020-early 2022.
For this reason, investors continue to move into stocks, despite the fact stocks are clearly in a bear market. The below chart is clear: the uptrend (blue line) from the March 2020 lows is broken. Moreover, stocks have taken out critical support (red line).
If you’re buying stocks because you believe the Fed is going to “save the day” again, you’re in for a world of hurt. Sure, the Fed has done this in the past… but inflation wasn’t present during those times.
It is now.
Basic economics tells us:
Demand + Supply = Price.
Supply for most items is down due to supply chain issues. Meanwhile, demand is UP due to the Fed and Federal Government pumping some $11 TRILLION into the financial system over the last two years.
Higher demand + Lower Supply = RAGING Inflation.
The Fed cannot fix the supply issues. It can’t print oil, tin, copper, or any of the other commodities the economy needs. The Fed is also powerless to address the dock worker, trucker, transportation labor shortages the country faces.
This means the only way the Fed can kill inflation is to destroy demand by triggering a recession. Put another way… the Fed DOESN’T CARE about stocks.
If you don’t believe me, maybe you’ll be Fed President Esther George.
Kansas City Federal Reserve President Esther George said Thursday that higher interest rates are needed now to bring down inflation and that policymakers are not focused on the impact that is having on the stock market.
Source: CNBC
Bear in mind… inflation is at 8+%… rates are at 1%… the Fed hasn’t even begun shrinking its balance sheet yet… and stocks are already doing this:
What happens when the Fed is forced to raise rates to FIVE percent (they’re 1% now)? What happens when it tries to shrink its nine TRILLION dollar balance sheet by $1+ trillion.
You get the idea.
The Mother of All Collapses is coming!