MAGGIE LAKE: Should we take the Fed at their word? Hi, everyone. Welcome to The Daily Briefing. Jim Bianco is with us today to talk through the Fed's hawkish commentary coming from Jackson Hole, Wyoming and the resulting bloodbath in US equity markets. Hey, there, Jim.
JIM BIANCO: Wait a minute. What are we going to talk about? I don't know. I guess corn had a move today. Maybe we could discuss that or something like that.
MAGGIE LAKE: Yeah, not much going on a sleepy Friday. Oh, it's ugly for anybody looking at their-- watching certainly the stock market for equity investors. So if you are lucky enough to be away from your screen on the beach, on a boat someplace, be happy--
JIM BIANCO: Stay there!
MAGGIE LAKE: --because we are-- stay there, exactly-- we are seeing a sea of red. The Dow down 1,000 points. NASDAQ down nearly 4% as we close out here. S&P three and change. We really saw a big reaction in the stock market to what was a pretty uniform message coming from the Fed, including Jay Powell, who did speak-- have a speech in Jackson Hole. Jim, just want to get your take on what we heard from all the Fed governors.
JIM BIANCO: All the Fed governors, yeah, it's kind of like a championship boxing match. The undercard was basically leading up to the main event when the heavyweight champ came out and gave his 8-minute speech. But they all said the same thing. And I think I'll emphasize it with what Powell did. In an 8-minute speech, he basically had one message for us.
There will be no pivot. There will be no pivot no matter what. Stock market could fall apart, economy could crash, the Fed will not pivot. Now, they may stop raising rates, but they're not going to cut rates. And I think that that message was received loud and clear by the stock market, and we found out just how much people were banking on the idea that there'd be a pivot.
MAGGIE LAKE: Yeah. So do you think that the reaction we are seeing is a repricing of that? Or do you think we have a combination here where we have maybe low volumes because of the summer.
JIM BIANCO: I think at this point, we did more than a 38.2% retracement of the entire rally from mid-June. And most of that came today, actually. That it's starting to look more like there was a bit of a repricing. As I look at my screen, we are going out on the lows of the day. The momentum is so strong right now. Cryptos are getting crushed. That'll be the thing to watch over the weekend.
For those who follow me on Twitter, I always post this over the weekend, that I think that Bitcoin is like a 24/7 VIX. If you want to know how we're going to open Sunday night, watch how crypto does. Last weekend, crypto got skunked over the weekend, and then we opened up down 70 handles on the S&P. And I think that that will tell you the tale of the tape. And I think that's what we're going to see, is we're going to continue to see lower prices. So to your question, yes, I do think it is a bit of a repricing.
And there's also a signal in there too. And the signal is, yeah, you could spend your time looking at companies, looking at fundamentals. You could spend your time looking at cash flows and products and positioning and narratives. But at the end of the day, this market's all about liquidity. And liquidity starts with the Fed. And the Fed merely said, we're not going to be putting it back.
We're not going to be putting back liquidity if the market falls. And that was big enough to give you down nearly 3.4% on the S&P today. That's quite a move for the Fed just saying, we're not going to cut rates next year. But we're also-- we all knew that they weren't done hiking rates.
MAGGIE LAKE: Yeah. Excellent point about crypto, Jim. And I love that you made it, because one of our community members tweeted out today, everything's correlated. And we've been saying that too. There aren't any silos. All of these things either reflect each other or are signaling each other right now.
Interesting, though. As we're looking at the sell-off-- and the important point listening is Jim's looking at this accelerate into the close. You didn't see any buyers come in at all. In fact, you saw people starting to bail out, even those who had held on. So that's never a good sign, when you see that accelerated selling into the close.
But the VIX is at 25. It's up 18% for sure, but it's still at a pretty low level. And you didn't see the sort of outsized reaction in the Treasury market. If you look at the 10-year, yields are still hugging right around 3%. Why do you think that is?
JIM BIANCO: Well, on the VIX, I think that's bear signal. What you really want to see is you want to see some form of a capitulation or panic in the market to tell you we're at a low. That'd be the VIX spiking over 30 or something like that. If the VIX wants to remain calm, good, we'll take it down 3 and 1/2% on Monday. And if it wants to stay calm, we'll take it out on 3 and 1/2% on Tuesday. And we'll just keep going until it finally throws up on itself, and then you'll have a low.
So that's the way I've always looked at the volatility measures. That they're good when they spike, then they finally tell you panic has hit. And if this is an orderly decline, then we'll continue this on Monday. Treasuries--
MAGGIE LAKE: Right, so that's important note. That's an important note. The fact that it didn't spike today is telling you that we don't have the capitulation and we are probably likely in for some pain come Monday.
JIM BIANCO: Right. To quote Eddie Murphy from the movie Trading Places, if this is fine, then I'll do some more of it. And that's what we're going to get. If the market wants to be complacent as a measure of a 25 VIX, then we'll get more of this.
Treasuries. There's two things going on in the Treasury market. On the front end of the yield curve, the two-year note almost made a new high yield for the year. Came within less than a basis point at today's high. Closed around 3.39, 3.40. The high print of the year was back on June 14 at 3.45.
Those yields are looking to be going higher, and sticking with the front end of the yield curve, you saw somewhat of a repricing in the Fed fund futures market. You've now got better than a 50% chance the Fed is going to raise 75 basis points in September. It's only around 60%, but it's still north of 50. That would bring the funds rate to 3 to 3 and 1/4 on September.
But what also's happened is the November meeting is now approaching 50% that they would raise rates an additional 50 basis points in the November meeting. That gets the funds rate to 3.50 to 3.75 two days after Halloween. That would far and away be the highest point in the yield curve unless the rest of yields start moving higher between now and then.
And certainly, I think the front end is going to move there. You could see the two-year note in the high 3's, maybe approaching 4%. The 10-year note will probably more reflect beliefs on the economy. It won't go up as much. And the yield curve is going to get even more inverted than it is right now.
And that is a signal of a slowdown in the economy and a potential recession. That is only going to grow. And if we do wind up November 2 that the highest single yield on the entire yield curve is the Fed fund futures as high as 3.50 to 3.75, that's another classic signal that the economy is in a full-blown recession.
MAGGIE LAKE: So I want to continue on the asset classes because I think it's really important if there's a repricing going on. So the dollar rebounded after the hawkish comments. We had seen-- the dollar's been strong in some cases-- unprecedented or certainly stronger than anything we've seen generationally. Took a little bit of a pause as everyone was thinking about the fact the Fed may be cutting rates next year. Resumed its upward trend.
And Luke Gromen tweeted out today, "in my opinion, the DXY will go up until the Fed blinks or breaks the US Treasury market again like it did in the third quarter of 2019." First of all, do you expect the dollar to continue to go up? And talk to me about the breaking the Treasury market.
JIM BIANCO: Yeah, so I do expect the dollar-- I think Luke's right, except I would argue that the answer is they're not blinking. They're breaking something. And it's going to have to be something big and something significant, because that's what Powell told us.
And so, you know, if we blow up a couple of hedge funds, don't even get Powell out of bed at that point. Blow up JPMorgan, maybe you can call him at 3:00 in the morning. Of course--
MAGGIE LAKE: But we've seen what happens when-- is that true, though, Jim? Because we've seen-- listen, the Fed said today very clearly, we're in for pain. Consumers are in for pain. The economy's in for pain. Labor market, we know that they're hoping to pull asset markets down. They want to kill demand. They have to if they're going to get inflation.
But do they want to break the financial system? Do they want to start to see hedge funds start failing and the Treasury market seize up? Because that creates a whole domino effect that seems to run out of the control of central banks, if the past is any gauge.
JIM BIANCO: No, they don't want to break it. They don't want to break it. And they don't even want to mete out pain. But what they want to do is they want to get rid of inflation. Now, there comes risks with it, and that's one of the risks.
I don't think-- if the answer is, well, the Fed can't keep raising rates because some hedge fund might have a bad year. Tough. They're going to keep raising rates. They're going to risk that. And that's why I said they're going to have to break things before we continue for them to blink.
Because when I said the Fed was going to pivot, that was the message today. That was-- part of that message is they're not blinking. Today in Wyoming right now, I think they're happier now at 4:00 PM Eastern than they were at 8:00 AM Eastern that the stock market is down 3.3%. People listening to us are probably not happier because they own assets. But they are. That's what they want.
Now, if it gets completely out of control, yeah, then maybe they might do something. But that's the point. It has to get completely out of control. So that's why I agree with Luke. They're going to have to break something. And I don't think they're going to blink. They're going to have to--
MAGGIE LAKE: This is where the risk is, right? They want to break the things they feel they have control over and can address. There's a fine line between that and a more significant market event, though, isn't there?
JIM BIANCO: There is, there is. And I think what we also have to remember, if you-- everything Powell said in his 8-minute speech-- and that, I think, was the most powerful part about it, was he was 8 minutes. It was four pages written, and it was on one subject. Basically, there will be no pivot--
MAGGIE LAKE: It's like Bart Simpson at the chalkboard. There will be no pivot, there will be no pivot.
JIM BIANCO: Right. Mic drop, left the stage at that point. He didn't want to address anything other than that. But I do think, though, that this is going to be the way that they've got to go. They believe inflation is a bigger problem than a couple of 1,000-point down days in the stock market. Than a couple of hedge funds having a problem.
Because inflation impacts 100% of the population. Inflation devastates the bottom 40% of the population. He said that. And they need to get that under control. So if people that own assets, if people that have marginal jobs are at risk, their attitude is that's just the price they got to pay.
So if the answer is, no, don't worry, they're not going to follow through on it, I think they made their message very clear. They intend on raising rates 50 or 75 this meeting and maybe 50 again in November. And they maybe push the funds rate to 4 or near 4. And then all throughout '23, they're not going to bring it down at all. And if inflation is still stubborn, they might keep going from there.
And I think that's the realization that came into the market. And yes, Raoul's been talking about this as well too. If the PMIs fall apart, if the economy falls apart, if jobs fall apart, they're going to keep raising rates. It's only if it gets to Great Recession 2008 epic proportions could we see them maybe back off, because at that point, they've broken inflation. At that point, the economy's so bad, inflation is done anyway.
But just because we're going to print low 40s PMIs, or we revisit the June lows, or maybe we print 50,000 jobs next Friday, some kind of massive miss in the jobs numbers, they're not going to-- they're on course to continue to raise rates. They're not stopping. That's what I think the market heard today, and why it had the reaction it did. The whole idea of a pivot is off the table, and we're seeing how much the pivot mattered to the markets.
MAGGIE LAKE: Yeah. So that puts us back on the month-to-month inflation just being so drilled down into those inflation numbers. Because despite all their hawkish talk today, we did see the PCE-- the personal consumption expenditure reading, and that's a favored inflation gauge for the Fed. It did go down. It's still at elevated levels, absolutely. But it is trending down as we're starting to see some other things trend down. Do we know what level the Fed is willing to accept to declare that inflation is under control?
JIM BIANCO: Well, their stated level's 2%. And that they're not going to stop until they believe that all of these metrics are headed towards 2%, and that they're going to basically stay there at 2%.
Now, you're right. Their favorite metric is PCE. That number's around 6. CPI is around 8 and 1/2. Historically, CPI runs around half a percent more than PCE. So if they think that-- they're going to keep raising rates and be restrictive until we get to 2% on the inflation rate. That's PCE inflation. That's about 2 and 1/2 on the CPI rate. So they've got a ways to go.
But yeah, I think that's what their stated goal is. Will they accept 3, 3 and 1/2, or something along those lines? I'll take them at their word. The answer is no. They still believe that 2% is the long-run goal for inflation. I don't. They do, and they're not going to stop until they get to this elusive 2% number.
MAGGIE LAKE: Andre from the RV side, I think that answers your question. He was asking, can the Fed pivot if the data for the economy would be bad enough, or are they determined to go with the hawkish tone until the end? Jim's read of this is until the end. So Bradley asking, if we're talking about the Fed tightening until something breaks, what breaks first?
JIM BIANCO: Well, hopefully, not the consumer.
MAGGIE LAKE: If we knew that.
JIM BIANCO: Yeah. Yes.
MAGGIE LAKE: I know that's why you're laughing. If we knew that, then we'd have some good trading.
JIM BIANCO: Yeah, exactly. I guess I'm going to preface that comment or assume in that question that he means which financial market, right? Because you could argue, will it be the labor market that breaks, or would it be the energy markets that break? In fact, you could argue that some of those markets have already broken to some degree. Would it be the import export market that would break?
But let's talk about financial markets. I tweeted out earlier this week an update of the total return chart in the bond market. That the global aggregate bond index is down more than 10% year-on-year. This is not only the worst year ever recorded in total return for losses in the bond market, it is far and away the worst year ever.
And it is breaking things. It's breaking housing, which is what we're seeing with the spike rate up in mortgage rates. I've argued even here on The Daily Briefing that I think we're already in recession. I think the two negative quarters qualifies as a recession. Done, conversation over. It is a mild recession. It could wind up being something more than that. Check back in six months.
But I think we already have one. That's a sign of something breaking. But I do think, though, that is if the Fed keeps going, if inflation stays problematic and rates keep going up, and that those total return losses in the bond market keep going, that's where you're going to have problems.
Remember about the bond market. Everybody hates it. It gives no yield. It has no potential for an 80% return. It's not [? ARKK. ?] The only thing the bond market can do is wreck everything. And that's what you have to be careful about with the bond market. And I'm worried that what you could wind up having happen, if inflation stays stubborn or the Fed continues on this and yields go up, will the bond market give you an opportunity? No, but it'll wreck everything else. And the bond market tends to do that at times.
Which is why we pay attention to it, which is why Raoul calls it the market of truth. There's a lot of truth to calling it the market of truth, because it has such an important-- it's such an important cog in the entire financial system. So watch the bond market because it is having an epic year. Doesn't look like it might be done with that epic year right now.
MAGGIE LAKE: That's a great, great point, Jim. And so many people-- there's been a lot of discussion, but usually, when you're getting killed in stocks, bonds are the place where you can diversify, or that's what people had as a diversification for equities. Everything's going down in tandem. It's killing professional managers, killing people who have that 60/40 portfolio set up to protect themselves against tough years.
JIM BIANCO: Yeah. I think I maybe even said it the last time I was on The Daily Briefing that I was talking to a well-known bond manager, and we were talking about