Wednesday's Market Minute: It's a Game Of Chicken The Fed Must Win

This is all a great game of chicken with two forces set to collide. On one hand is a generation of investors that has never seen a self-induced recession and believes the Fed is incapable of doing it; on the other, a central bank that has been clearly signaling a slowdown is coming. Most of the negative effects we're experiencing are due to market participants failing to realize the Fed's sincerity in its fight against inflation, and are hoping if they wail loud enough, Jerome Powell will stop.

Case number one: failing banks that couldn't fathom the possibility of rates rising this fast, so didn't take the appropriate measures to shore up their client base and adequately prepare for policy-tightening that would erode cash and both sides of their balance sheet.

The economic situation is indeed worsening as evidenced by recent employment data, but the Fed must keep hiking. It is the only thing that's preventing the spiral that so many doomsayers have foretold. Look at how gold bugs and bitcoiners are frothing at the mouth at what's happening: a stalemate on the debt ceiling unlike anything we've seen before / Banks collapsing on a weekly basis / The dollar losing its legs right when stagflation is knocking at our door with a percussive foreboding akin to Beethoven's 5th symphony.

This seriously may be it.

A generation of worries about uncontrolled debt spending bringing about the end of American greatness has been the bedrock for an industry of clickbait because it's based on some truth: that empires don't last forever.

If we let this inflation take hold, it may well be the beginning of the end. 

The latest pce data tell us that inflation has plateaued and is no longer going down in a meaningful way, instead finding a disturbing degree of comfort just below 5%. The debt ceiling that is typically a histrionic illustration of American sensationalism is actually looking like it may boil over into a complete breakdown of political functionality.

But guess what? The solution to the debt ceiling is obvious: raise it! Keep raising it! Do it forever -- it doesn't matter as long as we fight inflation. Mint the trillion dollar coin for all I care, just don't cut rates! There is no bigger threat to American greatness than letting inflation erode the purchasing power and the dominance of the world's reserve currency and everything it represents. It doesn't matter how much we print, as long as the product has value. 

This game of tug of war is lopsided in number of participants but also skewed in power: Jerome Powell has the tools to be the adult in the room and stabilize the system for the long term, at the cost of inflicting perhaps significant pain in the short term. Opposite Jay Powell, speculators are buying everything at any price again in hopes the Fed chair will cry uncle out of fear for his short-term reputation. They're doing everything they can to conjure dark stories about the future, but in reality, the economy has been shockingly resilient at every turn the past 3 years. That should bring us comfort in our willingness to accept a deeper slowdown at the cost of preserving the strength of the dollar over the long term. 

The latest ISM data of topline contraction but rising prices looks frighteningly like stagflation. If we allow that to fester then the doomsayers will be proven correct and the American model may break. Waiting in the wings of a dollar demise is a bilateral alliance between Russia -- an aggressive regime stuck in the imperialist mindset of the 1600s, -- and China -- a capitalist mirage that will turn draconian on a dime. And in the corner we have a tribe of crypto cavemen who want to send us back to a dog-eat-dog stone age because, at this moment, they're the most willing to bite. 

Powell cannot back down. He is the most important Fed chair in a lifetime. Hike, and do not waver.

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