The Bear Awakens

February 3, 2022

The bear has awakened, and it will not be limited to the stock market.

The bear awakens from a long, uneasy slumber and the everything bubble is in trouble.

I'm not going to make the bear case with charts or price-earnings ratios or sentiment readings or anything remotely financial. My bear case is a crisis of belief as faith in the religion of the Federal Reserve dissolves and the dumbfounded believers realize the Fed is a failed religion.

To understand the religion of the Fed, consider the Federal Reserve policies and actions that the market views as bullish:

-- Fed lowers interest rates: bullish.

-- Fed raises interest rates: bullish.

-- Fed eases: bullish.

-- Fed tightens: bullish.

-- Fed holds steady: bullish.

-- Fed changes course: bullish.

-- Fed issues guidance: bullish.

-- Fed is silent: bullish.

-- Fed sneezes: bullish.

-- Fed coughs: bullish.

-- Fed caught insider trading: bullish.

-- Fed increases wealth inequality to the point it unravels society: bullish.

You get the idea: merely by occupying the temple of the Fed faith, the Eccles Building, the Fed is bullish because the Fed has the supernatural power to rescind the business / credit cycle and keep the economy and asset wealth expanding forever and ever.

The Fed could reveal that all policy was decided by Ouija board sessions and the stock market would leap: whatever the Fed does is bullish by default. Any policy error can quickly be reversed and so any decline in assets can also be reversed. The occasional heretic can be banished and the true believers will again be rewarded for their faith in the One True Financial Religion.

As in the story of the stranger mistaken for a god by the tribe until a thorn prick draws blood, revealing the stranger's all-too-human mortality, the Fed's over-reach has consequences which are now drawing blood. Shakespeare's lines are apropos:

By the pricking of my thumbs
Something wicked this way comes.

Just as Macbeth is deceived by promises of invincibility by the witches, so too the Fed has been deceived by promises of godlike powers over finance and the economy. But just as Macbeth's machinations triggered civil war and turmoil, the Fed's over-reach has set a banquet of consequences that few are prepared to keep down, much less savor.

Attempting to banish the business / credit cycle--i.e. endless, recession-free expansion--has tightly coiled a financial spring to produce maximum damage when it finally unleashes its compressed power. In the political-social realm, the Fed's vast expansion of the already-wealthy's extremes of wealth has fatally destabilized the nation's democracy and social contract.

The Fed's supposedly godlike powers cannot resolve supply-chain scarcities or labor shortages. The Fed can create currency out of thin air and sluice it into assets owned by the top 0.1%, but it can't reshore manufacturing and materials supply chains or create experienced welders, pipefitters, crane operators, etc. out of thin air.

What happens when a religion with such fervent believers is revealed as an empty promise of limitless power, a failed religion? The faithful are dazed, distraught, confused and lost, and then the anger arises. How could the false gods have failed us so completely? Where are those who led us so astray?

The bear has awakened, and it will not be limited to the stock market. As the temple of a false faith tumbles, the wrath of the deceived and betrayed will be great indeed.

By the pricking of my thumbs
Something wicked this way comes.






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