Wednesday's Market Minute: The Fed is Right to Sink the Stock Market

It’s looking like one of the biggest mistakes in the inflation analysis this year was the conviction with which many said it was primarily a supply-chain problem. Crude oil is down 35% from its high and is below where it traded before Russia invaded Ukraine seven months ago. Same with wheat and lumber. The further we get from the original COVID shutdowns, the more the supply chain unbuckles. China has been a big laggard, but even the closures this past quarter weren’t worse than in 2020. Despite these improvements, inflation is stuck above 8%. Supply chain pressures have eased, yet inflation hasn't meaningfully moved.

So the sticky part of inflation looks to come more from elevated demand. This rings true in the robust employment picture as well as the details from consumer goods companies like Nike NKE and Target TGT that now have too-large inventories. The issue is not that they don't have the supplies to deliver the goods, the issue is that people bought all the shoes, couches, TVs, and Pelotons that they could fit into their houses during COVID. Now the things we want to spend our money on -- airlines, hotels, events, and weddings -- are absurdly expensive and dysfunctionally understaffed.

The Fed knows this and has made it clear that they plan to try and muscle these problems out by draining liquidity from the system, purposely sinking the stock market to reverse the COVID wealth effect of booming asset prices that contributed to an unserviceable level of demand in the economy.

This makes perfect sense, is patriotic, and good. There is no compelling evidence that our experiment with universal income during COVID meaningfully narrowed the extreme wealth gap in America. The COVID economy was most beneficial to existing owners of assets and corporate hype-men who pumped and dumped unprofitable businesses and coins into public markets.

Just consider who’s been whining the most about the Fed’s new posture: crypto charlatans and permabull fund managers and financial advisors who get paid to park your money in expensive high-beta stock funds. And we haven’t even done that much damage. We’re off the lows in stocks and there’s still $1 trillion in crypto assets. That some are feeling this much pain speaks to the amount of untenable leverage and exposure to risk assets there was in our system.

That's how we know this will be good. Just as fertile ground is birthed through fire, so too our real recovery should rise from the wreckage that reveals the truth of which products we need, which companies are the best at making them, and if there's anything in crypto that's not a lie or a scam. That's the cost of putting us on a more sustainable and equitable path. The Fed is right, just and moral. Godspeed.

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