Zero Hedges its Predictions with the Big Lie
It’s the most pervasive, market-magnifying delusion in history, which investors in the markets are telling themselves, and Zero Hedge exemplifies it best.
By looking at their lie or delusion through their own boasting as a specimen, we can protect ourselves from being swept into the delusion and will better understand what the Fed is really going to do, versus the pervasive fantasy built up around what they will do. It’s not that hard to see where the Fed is going clearly through the smoke … if you want to … yet it’s not at all where most are saying.
What a day of news as the world spirals into the “Year of Chaos,” which I am predicting this will turn out to be. It will spread beyond the chaos we experienced in 2023 and maybe beyond 2020, albeit in very different ways. Let’s begin with today’s disarray in markets. After the last couple of months in 2023 when bond and stock investors both believed they really had the bull by the horns and were going to stay on the bull throughout the entire rodeo that will be 2024, the bull threw them both off. 2024 had other plans.
The best the live stock riders can say of 2024 so far is that it’s a buckaroo of a ride. The S&P tagged its all-time high in late December, plunged in the first week of January, bounced back to that high again in the second week, and now dropped again this week. The bull riders in stocks appear to be trying to jackhammer their way through the high established at the start of 2022 before the year-long drop that followed, but so far without success. Right now, it looks like they’re hammering their own heads against the ceiling, and most news is turning against them, as is also the case for bond traders.
Bonds climbed easily past 4.06% for the 10YR Treasury today. It looks like those riding the bond bull might be catching on to the fact that they are entirely out of step with anything Fed Chair Jerome Powell has actually said the Fed will do and with anything inflation will let him do. The bond vigilantes’ revolt against Powell is one they don’t have the strength to win. If Powell needs to push rates higher again because the bond vigilantes have fallen asleep in their saddles, then that is what he will do. All the muscle is on his side if he wants to go tighter.
They’ll have to scramble to wake up and ride to safety when the gunfire from the Fed’s next salvo opens up … if that is what the Fed decides it needs to do now that markets are fighting the Fed’s tightening goals. Remember, the ONLY reason Powell said the Fed might not have to raise rates more in the first place was that the stock and bond markets had started doing the heavy lifting for him. That was happening exactly up to the day Powell made the mistake of making that statement; then all investors dove for the whiff or red meat they sensed and undid the tightening they had been putting in place. But ALL he really said was, IF they kept doing the job of tightening up financial markets, then the Fed wouldn’t have to press it further. They didn’t.
Powell is not likely that concerned because he has the power to simply reapply the tightening, himself, if he needs to, and rising inflation says he might need to. The bond market is betting on an 80% chance the Fed cuts rates in March. I’d give that a 0% chance unless the economy crashes in a hard landing. Why would the Fed cut rates (especially as rapidly as the stock and bond markets are betting) when the Fed and Treasury have clearly stated they see no recession anywhere nearby and when unemployment is holding flat by the most common measure and, on the broader measure that the Fed seems to pay less attention to, barely rising and when stocks are extremely high priced and when CPI inflation and PPI inflation have both returned to a slow but consistent rise in month-on-month figures and now year-on-year figures and when the Fed says GDP is likely to come in around 2% for the fourth quarter? The whole equation that markets are betting the farm on for those March rate cuts is absolutely nuts.
Of course, a few are saying that the rate cuts have already happened. Zero Hedge went full pivottard today with an article that practically screams in ecstasy about how right they are now that the Fed has pivoted! Let me quote the salient parts because their proud-as-a-dodo-bird display of absurdity is brightly colored today: “It’s all over!” they start out—not just high interest but quantitative tightening, too!
On December 13 the financial world was stunned when, just two weeks after Jerome Powell had said he it was "premature" to speculate on rate cuts, the Federal Reserve did a shocking U-turn and pivoted dovishly, ending the Fed's hiking cycle with inflation still running at double the Fed's target of 2%, and said that it had in fact discussed the start of rate cuts, contrary to what Powell said just two weeks earlier.
Well, except that the Fed didn’t do any of that. It held policy rates exactly where it had been holding them for a few months (which is to the hundredth decimal point exactly where I predicted a year ago they would likely end up holding rates). The Fed didn’t talk about actually lowering rates. Powell said that topic barely came up at all, but “barely” is all ZH needed to say, “Then they, at least, talked about it” and then turn that into “The pivot is done. It’s all over! It’s a fait accompli.”
The Fed’s notes indicated that lowering rates was not a discussion at all. It was more like someone at the FOMC meeting said, “Should we start to talk about when we are going to talk about lowering rates?” And someone else answered, “Nah,” and they all went back to sipping their port. That is about the strength of anything that was even implied in the minutes.
Today, the Fed clamped down on some of the speculation that Zero Hedge and nearly everyone has ventured out on (which is why I’m pounding this: it’s mass delusion). However, before we get to the Fed’s retort against the hysteria, let’s look at how ZH boasts in a way that is really an absolute lie. You see, if something never happened at all, but you desperately want to be finally proven right for constantly saying it will happen and, so, overstep and take a whisper from Powell the wrong way, then one solution to avoid losing face yet again is to go for “the big lie.” That’s where you make the lie even more extravagant and repeat it over and over as fact until everyone believes it must be true because who would make such a blatant lie over and over? ZH wants everyone to believe the Fed has pivoted or, at least, announced its pivot or, in the very least it is now a foregone conclusion. But NONE of that is the case.
This is the really big lie because it is what nearly all investors are telling themselves over and over about the Fed’s course in 2024 because they want to make it true. By understanding that, we can see how the delusion keeps them from hearing everything that the Fed is clearly saying. ZH will be our example of how the delusion works.
Here’s the big lie, which keeps getting bigger with each article they write, in the form of ZH’s feather-strutting boasts:
Or rather, we should say "the financial world that had not read Zero Hedge was stunned" because just one week ahead of the Fed's December FOMC meeting, we correctly predicted the Fed's pivot due to one simple reason: as we laid out in "The Canary Just Died: Sudden Spike In SOFR Hints At Mounting Reserve Shortage, Early Restart Of QE", the Fed no longer had a choice and was forced to pursue a dovish pivot because the liquidity in the all-important systemic and interbank plumbing had hit dangerously low levels, resulting in the highest SOFR print on record, and the biggest spike since the last time there was a repo market crisis in March 2020.'
As we said at the time, "the spike caught almost everyone by surprise, even such Fed-watching luminaries as BofA's Marc Cabana…. And yet, the spike was clearly there and ominously it was consistent "with the slow theme of less cash & more collateral in the system" - i.e., growing reserve scarcity….
They’re right about the dangerous spikes in the repo markets and the Fed’s overnight funding. I pointed out the same thing here and said it could indicate that bank reserves are getting overly tight as they did in 2019 and that this could lead to another repo crisis like we saw in 2019. The importance of that arcane area of finance is that it is the lubricant that keeps banks working. When it dries up, banks freeze up.
So, you read that prediction of a possible repeat repo crisis here, too. However, the Fed is notorious for never learning from its mistakes. While ZH says this virtually forces the Fed to stop quantitative tightening (QT), and not simply cut interest rates, and then ZH even leaps from that to saying it’s a done deal, I say “Hardly so. We’ve been here before, and the Fed bungled it completely.” They have amazing capacity to repeat their mistakes.
ZH says “The stop is in,” but that’s a lot of projection. The Fed hasn’t said it will end QT and hasn’t even started talking about it. All we’ve heard is one Fed member saying maybe they should start talking about when we’re going to talk about it so that they can give the markets plenty of advance notice to make adjustments—all of which means, Katie bar the door, the end of QT is many months away … unless, of course, the economy badly crashes because THAT is what I’ve predicted for a few years now will be what finally ends the Fed’s tightening cycle. In fact, what the Fed did say today reveals a lot about the ZH lie, and I want to go into it because this lie is pervasive throughout the investment world, and I’m surprise that normally astute publication is running with it. Maybe it is just their desire to sow chaos in America.
First, here the basis ZH gives for their extravagant claim that “it’s all over”:
"If funding pressure persists, it risks Fed re-assessment of ample banking system reserves & potential early end to QT", and depending on how bad the funding shortage gets, an early restart of QE.
The problem for ZH in calming this makes them right about the Fed pivot (at last) is that the Fed didn’t say that! Bank of America made that observation. The Fed may be as blindly unaware of it as there were in 2019 and as they were of reserve troubles in March of last year. I would lay out the same risks; but that doesn’t mean the Fed will do it or even see it coming. They usually don’t see much of anything coming. They miss every recession, and Bernanke even said they cause every recession by over tightening. They missed the last Repo crises. They missed the bank reserve problems that are directly in front of them and their responsibility to oversee so that four banks went bust.
The worst part of this thinking is that ZH claims they have already done it! They have already made a decision to STOP QT. The truth is they haven’t even talked about that risk yet as an agenda item. It has barely been a side conversation, according to their minutes and other FOMC voting members. Maybe they will put it on the actual agenda this month. They should, but I’ve learned to never underestimate their stupidity or, as many point out to me (and may well be right), they’re evil.
They either sinisterly plot to crash the global economy into utter ruin on purpose, or they are wedded to badly flawed philosophies they won’t let go of that keep them constantly repeating their mistakes. That actually happens to lots of smart people who become stupid because of the misguided philosophies they were taught—like brainy communists. So, never bet on the Fed’s ability to see what is coming and do the right thing BEFORE it happens. Least of all, never claim, “It’s all over!” as if it is foregone fact the Fed will see the risk and correct course in time and as if that proves your failed prediction right.
The conversation is important because I don’t want my readers to be caught up in the mass delusion that has swept markets.
One week later, the Fed capitulated on tight monetary policy and ushered in the era of rate cuts , just as we said it would.
An outright lie from a source that would have you believe they are highly objective (and sometimes are). It’s hard to actually usher in an era of rate cuts without making any rate cuts or even seriously talking about when you are going to talk about making them. The conversation may begin at the January meeting, but it hasn’t begun yet; and then it is still just talk.
But more importantly, one month later it was Dallas Fed president (and former head of the NY Fed's plunge protection team) Lorie Logan who said the quiet part out loud when she confirmed our "canary in the coalmine" note, namely that the Fed's QT is effectively over due to the sudden, unexpected slide in systemic liquidity, primarily due to the rapid drain in the reverse repo facility which now has just $600 million left and is set to be fully drained some time in March...
I, too, pointed out these things to all you you here as something that could become critical in March, but one Fed member saying on her own that it is time to start talking about when to talk about it is far from doing it — far from a victory on the actual pivot.
And I grind over all of this because now we get down to the next truth that ZH distorts, but I want to point out what the situation really means:
Of course, it's one thing for a regional Fed president to opine on such things…
Exactly. It’s barely meaningful because she is NOT the Fed making a decision that proves “it’s all over.”
…it's something entirely different for Powell's preferred media leak conduit to confirm it, and yet this morning that's precisely what happened when Nick Timiraos, aka Nikileaks, aka Powell's favorite media mouthpiece confirmed that QT's days are now numbered writing that "Fed officials are to start deliberations on slowing, though not ending, that so-called quantitative tightening as soon as their policy meeting this month. It could have important implications for financial markets."
Here’s the thing: QT’s days have always been numbered. No one has ever thought it would continue forever, and what Timiraos says here is far from “it’s over.” He says, it is time to start deliberating on when they may slow the rate of QT, which means it will be continuing for many months even after the deliberations begin. He specifically says, “though not ending.” The importance is this. If they talk now about when to begin tapering, the tapering may not even start until Summer, and then it may be gradual for another year! We don’t know. That means QT is “far from over,” and with trouble already brewing, as I’ve pointed out, in the repo markets on what is supposed to be the most boring interest rate in the world, it is likely the Fed will go further than it actually can this time just like it did last time and end up in another banking crisis before “it’s over.”
Here is why this is important, according to Timiraos:
… its rationale for tapering bond runoff is different: to prevent disruption to an obscure yet critical corner of the financial markets.
Five years ago, balance-sheet runoff sparked upheaval in those markets, forcing a messy U-turn. Officials are determined not to do that again.
The problem is, since deliberating when to start to slow QT means QT is many months from being over, the Fed may simply not have that much runway left. That means Powell does not achieve a soft landing because his plane runs out of runway and into the woods. After all, the Fed wants to …
communicate their plans to the public well before any changes take effect, according to minutes of the meeting.
So, it’s not over! It’s months from being over! There has been no pivot at all, and the most we have is that the Fed will soon be talking about when to slow it down, which will be “well before” they actually do slow it down, which will happen well before they stop it! And that leaves plenty of time for another repo crisis to form later in 2024.
Moreover, all of this still depends on the Fed beating inflation so they can do this, and the tide of inflation has begun to seep in against them for now.
It’s important, ZH claims, because …
As we first explained almost two months ago, the reason for the Fed's panic is that the central bank wants to avoid the same repo market cataclysm that market both the liquidity drain in Sept 2019
What a load of hype. I don’t see any panic here at all. They have just started whispering maybe it is a good time to start talking about the next phase of continued tightening — the wind-down.
But it gets worse.
In another article today that ZH did not write as its own views but did post, the risk (coming back to markets where we began) for any investor in being wrong about what the Fed will do and when it will do is …
Bonds are cruising toward a likely bruising by pricing in an almost immediate Federal Reserve pivot to rapid, deep interest-rate cuts. The risk is that they will prompt the central bank to push back hard enough to set off fresh cross-asset turmoil.
Yes, the Fed may have to actually tighten harder because of all the market’s fantasies. That is the crucial point. The correction in markets could become quite chaotic when markets are all, like ZH, so far out of touch with what the Fed will do and when it will do it. With inflation rising and markets easing financial conditions, the Fed may actually have to go back to raising interest, which will put the markets extraordinarily out of balance with the Fed and with economic reality all around. The more wrong everyone is about this because they keep chasing the same collective Fed fantasies, the more chaotic the year will be when the delusions about March and the months following are corrected.
The article ZH chose to post but apparently didn’t read or didn’t take seriously enough goes on to say,
Markets see about an 80% chance the Fed will trim its benchmark in March. While inflation has slowed substantially and jobs growth has cooled, it’s hard to see the justification for such one-sided bets. Indeed, the latest consumer-price and payroll numbers surprised modestly to the upside, suggesting the Fed is still likely to be far from convinced its policy of returning inflation to target has been a success.
Exactly. The March bet is a fool’s bet. The Fed’s fight is far from over. That is not to say it will not end or start winding down later this year; but, by then, the destruction to banking and the economy could be splattered all over the place just like it was in the latter half of 2019 …or worse.
The confidence in a March cut is also puzzling given the short runway. There are just two more sets of reports before that month’s meeting, considering payrolls and the two most relevant inflation readings: the Bureau of Labor Statistics figures, and the PCE deflator the Fed targets.
Exactly. The cart here is far ahead of the horse. ZH should start paying attention to the articles it didn’t write and the predictions it didn’t make but did post.
Here, from Timiraos, is what a Fed panic actually looks like:
.. in September 2019, a sharp, unexpected spike in a key overnight lending rate suggested reserves had dwindled to the point they were either too scarce or difficult to redistribute across the financial system. The Fed began buying Treasury bills to add reserves back to the system and avoid further instability.
The Fed bolted back to QE, and it took months of emergency measures to keep the banking system from freezing over. Now, consider what eventually tapering means:
First, the Fed is [currently] shrinking its Treasury holdings by $60 billion a month—twice as fast it did five years ago.
So, even if they start to taper QT by a whopping 50% of their current speed several months from now, they will still be doing QT at the same rate they did when the whole system crashed in 2019!
Slowing the pace of the runoff later this year might allow the Fed to continue the program for longer than otherwise by “reducing the likelihood that we’d have to stop prematurely,” Dallas Fed President Lorie Logan said in a recent speech.
Slowing the pace, maybe all the way down to the level of the massive QT that froze banks over in 2019 and not until “later this year” is far, FAR from “it’s all over!” Doing it so that you can continue QT longer hardly sounds anything close to full stop.
So, ZH isn’t even close to right in its pivot predictions regarding either interest rates or QT, but it wants to keep claiming its prediction is victorious. The risk to understand by examine this is that such delusions keep the markets betting high on those March rate cuts and missing altogether the likelihood of massive trouble yet to emerge within the banking system due to the Fed’s tightening! Such a SLOW pace toward actually ending QT means breakage is very likely. And we are talking very slow based on what is said here.
Now, let’s take a look, as I said we would, at how one Fed voting member clarified this today:
Fed’s Christopher Waller advocates moving ‘carefully’ with rate cuts
Federal Reserve Governor Christopher Waller acknowledged Tuesday that interest rate cuts are likely this year, but said the central bank can take its time relaxing monetary policy.
“Carefully,” as in slowly. Not panicked, not quick, but “taking its time,” and maybe not even quick enough to say they learned how to avert their past mistakes because there is no talk of ending tight policy this year but only relaxing it in order to continue it longer, and even that all depends:
“As long as inflation doesn’t rebound and stay elevated, I believe the [Federal Open Market Committee] will be able to lower the target range for the federal funds rate this year,” Waller said in prepared remarks for an audience at the Brookings Institution.
That may mean lowering interest one notch late in the year, but ONLY IF inflation doesn’t rebound. The problem there is that it looks like inflation is rebounding a little already and is certainly, in the very least, “staying elevated.” So, the condition for “relaxing” the tightening process a little is looking problematic for the Fed at best.
Things brings up another big fly in the ointment: They may not have a choice to avoid the problems that fighting inflation creates BECAUSE back in 2019 they didn’t have ANY inflation above their target to fight! They had been struggling to get inflation UP TO their target. That means they had total latitude to shift back to QE in a panic when their tightening hit the limits of what banks could manage. Now a panic move to QE would send inflation soaring, and the whole battle would have been for nothing. Imagine what that would do to markets and consumers—to think that we have to do all of this all over again!
“When the time is right to begin lowering rates, I believe it can and should be lowered methodically and carefully,” he added…. “I see no reason to move as quickly or cut as rapidly as in the past.”
Hardly sounds like a panic or a done deal. This is the news that gave those bond market vigilantes a wakeup call today and stood them back up in their stirrups, ready to ride. It also sent the dollar sharply back up, as I was just saying in an interview on GoldSeek Radio we could likely expect. (How long the bond vigilance lasts, given the languor and delusions about risks throughout that market, I don’t know.)
That doesn’t sound like any form of a pivot or end of QT is anywhere near imminent. It will happen “when the time is right,” and even then “methodically and carefully.” So, no quick reflexive action expected. Certainly no “pivot,” which means a snap turn. It will be much more like I have been saying: it will be like turning an ocean liner or oil tanker, using up half the ocean to do it.
And that, again, means the Fed may be way too late, making my longtime prediction of how this ends based on the Fed’s track record likely to be right on: The Fed will change policy after the economy and particularly a number of banks lie in ruins due to Fed tightening, which was necessary due to the sins of Fed largesse. In that event, it MAY not have to worry about re-ignithing inflation because severe recessions tend to deflationary, BUT even that cannot be counted on, as some of the worst recessions in the world, like the one that hit the Weimar Republic in Germany, have been hyper-inflationary. Much will depend on whether the Fed goes back to full QE to try to save the banks and the fallen economy and whether it does that in times that are already inflationary, as could well be the situation it finds itself in.
We’ll watch for that as it comes.
The recession is now
Now, as for that recession that I don’t think you’ll see show up in real GDP because of how cooked the books are on inflation that gets subtracted out, today’s news was starkly recessionary where it counts. The GDP numbers may never agree, so the Fed won’t see the recession it is already in; but that is typical of the Fed. Plenty of other numbers are screaming recession already, which is why I’ve predicted the Fed will tighten us hard into recession. It’s because we are already in recession in real terms, but the Fed (and just about everyone else) doesn’t believe it simply because GDP doesn’t agree, which is only because inflation is not fully adjusted out and because of the most bizarre and huge adjustment in CPI ever made over health care costs.
Today’s stories point out that corporate reports that are coming in from banks are downright dismal. Lance Robert points out in a sharply clear article that earnings in most corporate reports are only beating estimates because estimates were downgraded harder than they ever have been before the corporate reports came out in order to lower the bar for a beat more than even the usual easy targets that have been a constant corporate game for twenty years. Goldman Sachs, for example gave its worst profits report in four years — net income down 24% for the full year!
The beats are fundamentally meaningless because everyone lowers expectations as much as they possibly can in order to finish the race seemingly good. In truth, business is way down, and that became starkly obvious in the Fed’s Empire State Manufacturing Survey today. Negative numbers in the survey indicate a manufacturing recession, and the previous reading was already -14.5; but that fell off a cliff today, plunging down to -43.7, which was the worst print in the survey's history outside of the COVID lockdowns.
So, in real terms, yes, we are in a manufacturing recession—deeply in one. Services have been falling, too, which would make for a total recession, except one category: government spending, which is to some degree legitimately gross domestic product (when the government spends the money building bridges or helping to build Fascist factories (because that is what Fascist economics is—a joint partnership in spending between the good ol’ boys that run things and the government)).
So, anticipate that Bidenomics will keep GDP afloat because of the massive government spending, which we see in the news today is becoming a serious threat due to the flood of new bond issuances that may drive government interest rates ripping through the sky, another major problem when it hits in the Year of Chaos.
(Today’s headlines are free for everyone, but a paid subscription gives you access to the headlines every weekday and also is the only thing that makes editorials like this possible, as I could never spend time researching and writing out the truth where others fail to if I did not have supporters making that time justifiable. I hope you’ll consider adding your support. Plus you get the weekend “Deeper Dive” that is only available to paid subscribers. That is where I lay out in detail my predictions for 2024. This weekend’s edition laid out my predictions for rapidly broadening war in 2024 and war’s further impact on inflation. I think war will bring much more chaos in ‘24 than it has in a long time, and today’s news also shows how military alliances are already experiencing division over the battle against the Houthis now that the US and UK have taken the war directly into Yemen. So, it is not just the international conflicts that will grow chaotic, but the conflicts within nations as the citizens of those nations struggle over how far to go, versus how far their leaders want to go, and over how to fund it all when they are already piling up monstrous mountains of debt like never before.)