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August
30
2022

Now Everyone is Afraid of Jerome Powell
Tom Luongo

Back in January I wrote a piece called, “Who’s Afraid of Jerome Powell?” Then I discussed the incipient wailing and gnashing of teeth coming from those terrified of a hawkish Fed. Our entire society has become so addicted to cheap dollars and easy credit that it created a “Ballers” mentality society wide.

Ballers is all about the corruption money brings to those few thousand people in the NFL and their organizations because of the millions of people who spend too much money on a passing fancy, entertainment.

The NFL, like all pro sports, is nothing but a money funnel with a Federal Reserve sized Hoover attached to it. It’s the ultimate corruption of e pluribus unum. From many to one.

Take a little bit from all of us, time and again to help us relieve the stress of the shitty world they’ve built. Give some of it to the rubes who play the game, who blow it on hookers, high end cars, and drugs, while the lion’s share gets sucked right back up into the same oligarch class that created it in the first place.

But it’s no different than you or me, buying shit we don’t need on credit, self-medicating with pro sports, alcohol, video games, day-trading cryptos on Robinhood, yelling at racists on Twitter or my personal favorite, a ridiculous board game collection.

We’re all ballers to one degree or another, spending easy money on distractions rather than facing the reality that the most unsustainable thing about our society is the money which makes it all happen.

Here we are eight months later and Powell has done exactly what I’d hoped he’d do, aggressively raise rates and begin shrinking the Fed’s balance sheet once his second term as FOMC chair was confirmed.

After July’s second 0.75% rate hike in as many meetings the talk was all about the ‘hints’ embedded in Powell’s demeanor and presser that the Fed was on the verge of pivoting and reversing rates. This talk has been going on since before the first 0.25% rate hike in March.

It reached a fever pitch after the July meeting because of a number of factors which have almost nothing to do with US domestic economic data or the needs of the US as a country. As I’ve discussed ad nauseum, the group most exposed to an aggressive Fed is not the US economy, which is what the headlines are now focusing on, but the European Union and the ECB.

I never expected Powell to indicate any kind of pivot talk at Jackson Hole last week. His nine-minute speech was the exact opposite of that. It was a complete dispelling of the illusion that the Fed has any mind to change course any time soon.

Powell explicitly addressed that this policy will lead to a prolonged recession. Moreover, he admitted that the current problem is a sincere mismatch between supply and demand. And, in the shock of all shocks, admitted what myself and a few others have been saying for months now, the Fed’s tools are not capable of dealing with the supply side of the economy, only demand.

In short, we have an oversupply of economic activity that supports the Baller lifestyle of the past and a deficit of things that support that lifestyle. All the Fed can do at this point is restore lost credibility with the markets and protect its future.

This, in my opinion, is exactly what they are doing.

The question is who is the Fed trying to protect itself from? It has been my contention for months that the Fed is no longer on board with coordinating Central Bank policy globally to suit the needs of foreign actors, in particular the European Union and the ECB.

By refusing to fold to the pressure earlier in the year and going forward with hiking farther and faster than anyone (including myself) thought they would or could the Fed has placed the ECB into a bind. Powell’s speech at Jackson Hole tightened that bind to the breaking point.

Since most of our prominent politicians are on Team Davos the wailing will never stop. It took Elizabeth Warren all of twenty minutes to find a microphone to screech into:

“Do you know what’s worse than high prices and a strong economy? It’s high prices and millions of people out of work. I am very worried that the Fed is going to tip this economy into recession,” Warren told CNN on Sunday.

Yes, of course the Democrats are 1) still denying that we’re in a recession and 2) that it’s not their fault. But Warren, being the good destructionist she is, refuses to admit that there comes a point where you can no longer spend money to prop up an economy with these levels of imbalances.

This was precisely Powell’s point in his speech at Jackson Hole. And if Warren or any other so-called leader we have on Capitol Hill was willing to stop bitching and listen they would see what is clear to everyone.

The Baller Days are behind us.

The yacht’s trashed, the caterer left, the punch bowl empty and the credit cards maxed. Oh, and now there isn’t even a new contract on the table. There’s no money left for trillions in giveaways to buy votes from people with no skin in America’s game.

But, since Lizzie works for those trying to destroy the US, of course she’s worried for the future. Where are her checks going to come from?

While the Fed has the magic money tree, even it, sometimes has to be watered and fertilized with something that looks like savings.

This is why everyone was afraid of Powell in January. They had rightly guessed that he was serious about the job of bringing back credibility to not just the Fed but the US as well.

The real pivot wasn’t the one that everyone wanted from Powell in some nebulous future. The real pivot occurred back in July when the ECB raised rates and announced their newest program to shuffle deck chairs, the TPI — Transmission Protection Instrument.

There ECB President Christine Lagarde announced she would defend internal European credit spreads to manage the risks within the EU as it now was being forced to raise interest rates.

Lagarde never wanted to raise rates. But, as far behind the curve as Powell was in January, Lagarde was on a different track in July. This was her Mario “We will do whatever it takes” Draghi Moment and it fooled the markets for about a month.

 

Tom Luongo is Publisher of the Gold Goats n Guns. Ruminations on Geopolitics, Markets and Goats.

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