There’s an old joke retold by Woody Allen in the movie Annie Hall:

“A guy walks into a psychiatrist’s office and says, hey doc, my brother’s crazy! He thinks he’s a chicken. Then the doc says, why don’t you turn him in? Then the guy says, I would but I need the eggs.”

Isn’t that the essence of the market we’re in? The US has $28 trillion of debt and much more on the way. The Fed’s balance sheet stands around $7.8 trillion.  Stocks are trading at silly multiples. The bond market, the last bastion of truthiness regarding the economy has gone mute in spite of spiking inflation.

We know that all of these things are a special kind of crazy that has never ended well in the past. But, the economy is counting on this go-for-broke craziness to give the appearance of normality and, if we’re lucky, pump out a little wealth effect to the 99.999% without yachts – hopefully enough to offset inflation.

We go along with it because we need the eggs.

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Futures are almost back to green, regaining 26 points of their overnight lows on the latest failure of VIX to hold its 200-DMA – the 8th cross in the past 8 sessions – and its subsequent 20% beatdown.

While this morning’s economic data continues to disappoint (Phil Fed 31.5 vs 42 est.) markets are heartened by the prospect of continuing Fed intervention.

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Watching the parade of Fed presidents deliver their rimshot-worthy proclamations that there is no inflation problem reminds me of a scene in Mel Brooks’ History of the World.

Brooks’ character, applying for unemployment in ancient Rome, describes himself as a “standup philosopher” who “coalesces the vapors of human experience into a viable and meaningful comprehension,” to which Bea Arthur responds, “Oh, a bullshit artist!”

In this morning’s housing data we see more evidence that even though prices are rising at a problematic rate – courtesy of the Fed, which insists there is no inflation problem – at least some areas of the economy are stagnating. Single-family housing starts plunged 9.5% (versus -2.0% expected) and permits increased only 0.3%. It seems builders know something the rest of us don’t.

According to the NAHB, “75.1 million households, or roughly 60% of all U.S households, are currently unable to afford a new median priced home.” This is a situation unlikely to resolve itself any time soon given the soaring price of lumber – again, courtesy of the Fed, which insists there is no inflation problem.

It’s no better in the rental market. The average price of a 2-bedroom apartment is up 5.3% YoY (over 30% in cities such as Las Vegas or Detroit.) Though multifamily starts are struggling to keep pace (up 4.0% YoY in April) the supply-demand picture is under mounting pressure from increasingly unaffordable single-family housing.

The futures, fresh off another overnight ramp job, haven’t yet reacted to the latest indication of stagflation.  I supposed you can’t have stagflation without inflation – which the Fed’s philosophers will go on insisting doesn’t exist, like a Kanizsa triangle that isn’t really there.

To everyone else – especially those the Fed claims to be trying to help – it’s easily visible. It’s the Fed’s economic projections that seem to be without form or substance.

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Futures have given back about 20 points of Friday’s meltup, chiefly on the failure of VIX to break down and oil/gas to continue bouncing.

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April retail sales came in below expectations this morning, unchanged from March versus +1.0% expected following a 10.7% stimulus-boosted print last month. Core was even more disappointing, shedding 0.8% MoM. Strong increases were seen in cars and food services, with other “opening-up” categories such as clothing, sporting goods, and general merch tumbling sharply.

The annual data was, of course, very positive given where the country was a year ago. Perhaps the better way to evaluate it is by looking at the longer-term picture. Thanks to the stimulus payments, retail sales blew through the long-term trend in January and are just now settling back to trend.Of course, the pandemic drove a sharp increase in online sales – while retail employment dropped like a rock during the shutdowns. It has yet to come close to pre-pandemic levels and, given the general decline already underway since 2016, is unlikely to do so anytime soon.

The markets could care less about unemployment – focusing instead on the effects of trillions in stimulus and QE, the justification for which is said unemployment. If more people returned to work, the Fed would presumably trim back its support for the markets.

But don’t count on it.  Yield Curve Control is effective, but quite addictive.

Futures backtested the red TL (erstwhile H&S neckline) overnight, primarily on the usual beatdown in VIX, which closed back below its SMA200 and gapped down below its SMA100 overnight. It’s off about 25% in the last 24 hours – a strong signal to the algos.

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