Stocks are drifting lower this morning as we close out the month – the 7th positive month in a row. A number of important patterns are being tested, including a Fibonacci fan from the Aug 19 lows.

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Historically, rising inflation has always produced an increase in interest rates. Investors demanded higher rates to keep up with inflation, and bond prices dropped (yields rose) commensurately.

The Fed has had to cope with this precept ever since its inception.The correlation between the two has been as immutable as, say, COVID-19 and 2020 indoor weddings.Just as vaccines have changed the wedding landscape, the Fed’s unprecedented expansion of QE has made high inflation survivable. By essentially buying up the entirety of the Treasury’s issuance, the Fed has broken the link between interest rates and inflation.

Markets have thus been trained to ignore the inflationary risks [what’s the big deal?] and push on to new highs seemingly every day. Consumers, particularly those who have no investable assets, aren’t so lucky. They are struggling with the rising rent, food, gas prices, etc. which the Fed’s actions have produced – a fact which many Fed presidents (but not its Chair) have acknowledged.

Stimulus payments and an eviction moratorium provided consumers a modicum of immunity, but those protections have been discontinued. The next few months will be quite different for the have-nots. Will the effects be contagious? Will breakthrough infections spread through the broader economy?

You can put a COVID patient suffering from respiratory failure in an ice bath and bring down their fever, but they’re still very sick. Likewise, central banks can produce the appearance of a healthy economy by forcing interest rates/volatility lower and stocks higher, but they’re only treating the symptoms. Stagflation remains a very serious concern.

Stay tuned.

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Powell’s virtual Jackson Hole testimony is coming up. But, the cat’s already out of the bag. The other Fed governors have spoken. Inflation is clearly more than transitory. It’s (past) time to start tapering the massive asset purchases.

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When uber-dove Jim Bullard says it, you start to pay attention. Joining the chorus of Fed presidents calling for a tapering and subsequent rate hike, Bullard said “We will be able to get to a good consensus on the committee and get to a good wind-down process. It does seem that we are coalescing around a plan” to taper the $120 billion monthly purchases.

Bullard went on to rising inflation which exceeded the Fed’s expectations (but no one else’s) and even commented on potential asset bubbles in the housing market, referencing the Fed’s policy mistakes in 2005-2006 which made the GFC possible.

The market reacted by shedding 8 points, half of which it promptly regained.

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Yesterday’s meltup, like most Mondays, had a very clear objective: reach new highs and protect them at all costs. It’s also a pattern typical of most weeks during which a Fed meeting (e.g. Jackson Hole) is scheduled.

The mechanics of achieving this objective haven’t changed in the past 10 years: crush volatility, ramp oil futures, devalue the yen, etc. The ease and frequency with which they’re employed, however, is nothing short of astonishing.

This time, they didn’t even wait until ES had reached its 50-DMA. It makes you wonder: what are they so afraid of? Is the market otherwise so fragile that it needs constant manipulation in order not to crash?

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Futures are off moderately this morning, failing to hold the SMA10 overnight after testing the SMA20 on its way to a lower low during yesterday’s session.

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