There was a time when markets tried to force the Fed’s hand by crashing. Now markets are enabling the most hawkish Fed in 40 years.
By Wolf Richter for WOLF STREET.
It was an amazing show today – how markets reacted to headlines that exuded “dovish” somehow after Fed Chair Jerome Powell, speaking at the Brookings Institution, hit all the hawkish buttons: likely a 50-basis-point rate hike at the December meeting, to 4.5% at the top end of the range for the federal funds rate, then more rate hikes (plural) next year, to a higher “ultimate level” even than projected during the shocker September meeting when the Fed had issued projections that the upper end of the federal funds rate target might hit 4.5% by December, and 4.75% or 5.0% by the end of 2023, far higher than expected.
But Powell moved the “ultimate level” even higher today than the projections in September. He said, “it seems to me likely that the ultimate level of rates will need to be somewhat higher than thought at the time of the September meeting.”
“It is likely that restoring price stability will require holding policy at a restrictive level for some time. History cautions strongly against prematurely loosening policy. We will stay the course until the job is done,” he said.
Other Fed governors spoke before him this week, and they agreed with Powell: Even higher than projected at the shocker September meeting, and keeping it there for even longer. The range is 5% to 7%, according to Bullard, and Powell today moved into that range.
Just about everything in the speech was hawkish, including Powell’s frustration that core PCE inflation hasn’t come down over the past 12 months, that it has “mainly moved sideways.”
“Despite the tighter policy and slower growth over the past year, we have not seen clear progress on slowing inflation,” he said.
“So when will inflation come down?” he asked.
He cited the forecasts of declining inflation and added, “But forecasts have been predicting just such a decline for more than a year, while inflation has moved stubbornly sideways.”
“For starters, we need to raise interest rates to a level that is sufficiently restrictive to return inflation to 2 percent,” he said.
He spent a good amount of time on analyzing what might cause core inflation, as measured by the core PCE price index, to refuse to fall in 2023, even as inflation in core goods is backing off: housing inflation and inflation in “core services less housing.”
He expects housing services inflation (rents) to continue rising “well into” 2023. But his bigger concern was inflation in “core services less housing.”
Core services less housing account for more than half of the core PCE price index; it’s insurance, healthcare, education, haircuts, auto repairs, hospitality, etc. And core services inflation has risen in recent months. “This may be the most important category for understanding the future evolution of core inflation,” he said.
“Because wages make up the largest cost in delivering these services, the labor market holds the key to understanding inflation in this category,” he said.
He provided this chart, showing the three categories of the core PCE price index:
- Core goods (red line) where inflation has backed off from the spike
- Housing services (thin blue line) that continued to surge
- Core services less housing (fat green line):
Given how important wage increases are to inflation in “core services without housing,” he discussed the labor market. And the labor market is still too hot. He cited the figures we’ve been looking at in amazement for months.
“In the labor market, demand for workers far exceeds the supply of available workers, and nominal wages have been growing at a pace well above what would be consistent with 2 percent inflation over time,” he said.
“Thus, another condition we are looking for is the restoration of balance between supply and demand in the labor market,” he said.
“For the near term, a moderation of labor demand growth will be required to restore balance to the labor market,” he said.
“Wage growth, too, shows only tentative signs of returning to balance. Some measures of wage growth have ticked down recently. But the declines are very modest so far relative to earlier increases and still leave wage growth well above levels consistent with 2 percent inflation over time,” he said.
“To be clear, strong wage growth is a good thing. But for wage growth to be sustainable, it needs to be consistent with 2 percent inflation,” he said.
So Powell and the Fed governors are largely speaking in unison: Rates will have to go even higher than projected during the shocker September meeting; they will have to stay there longer; and rates will need to rise enough to where the real federal funds rate (federal funds rate minus core PCE rate) will be positive.
And fireworks broke out on Wall Street.
The S&P 500 jumped 3.1%, the Nasdaq jumped 4.4%, the 10-year Treasury yield – hilariously, on hearing that rates will have to go higher and stay higher for longer – plunged 17 basis points. And all this was dressed up in a headline that exuded “dovish” somehow. It was quite a show.
But think of it this way: When financial conditions loosen, as they did today, the Fed is going to have to raise higher and keep it there longer because monetary policy works through tightening financial conditions, and for inflation to come down, financial conditions have to tighten, not loosen.
I mean, markets are shooting themselves into the foot with these rallies, and Powell knows this too. Let them, he’s thinking while raising to 4.5% in December and to 5% and even higher next year, which no one had envisioned a year ago.
These crazy rallies are a good thing.
The last thing we need is a crash that would cause the Fed to wobble in its determination to crack down on inflation. These rallies will keep QT going, and they will keep the rate hikes coming, and they will keep the Fed focused on inflation instead of having to deal with a market meltdown.
There was a time when markets tried to force the Fed’s hand by spiraling down. Now markets, with these sporadic rallies, are supporting the Fed’s crackdown, and they’re enabling the most hawkish Fed in 40 years to keep going.
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Personally I think FED should hike 75 bps in December if they want to show sincerity.
They don’t need to “show” sincerity. They ARE sincere. They already hiked by 375 basis points in 8 months, that fastest in 40 years, on top of QT. The longer markets blow off the Fed, the better for the Fed’s inflation crackdown, and the bigger the inflation crackdown — that’s the whole theme here.
This is because the Fed has lost it’s credibility.
No one believes what any of the governors say anymore, even when they’re serious.
Dec 2018 really screwed them and the continued response destroyed what was left.
Wolf, FED seems to risk an even bigger credibility crisis because it has still not dented inflation. Statistically, the drop to 7.7% may just be noise.
However the rates on treasuries, bonds and mortgages keep falling, the labor market remains super hot with wages growing, and housing remains crazy unaffordable. So how does Fed control inflation with a 50 basis points hike?
Is it that elections are over and so Fed can let inflation screw the 99%.
Also protecting asset bubbles will only drive more speculation in place of really productive investments. The resultant drop in production can cause inflation to run hotter.
There are no easy wins here, only easy losses.
With the Rail Strike settlement n the works we will see a wage spiral taking over the headlines from asset price inflation. They are getting $11,000 in back pay, paid sick leave, and a 24% wage increase to a $160,000 base salary in 4 years. Now do you really believe that some big city School Teacher’s union is going to sit back and see that and not demand some gigantic wage and benefit increase in the very near future. Or some local transit workers in big city? If you believe that no wage spiral is going to happen after this strike is settled then I’ve got bridge over the East River in NYC I’ll sell you.
Swamp-by way of accuracy, they didn’t get sick leave, paid or unpaid…
may we all find a better day.
How can a fraudulent, unconstitutional (and therefore illegal) corporation that exists to benefit insiders and lies all the time be considered sincere?
There is no point calling the Fed fraudulent, unconstitutional (and therefore illegal). It is what it is…Live with it…..
The Fed measures its success by benefitting the 1%. In a bad economy, when growth stops, it has to play a zero sum game to succeed : It screws the 99% to enrich its 1%. I guess we need to prepare for higher inflation!
@ Anthony =
1. you don’t think activities of the FED are fraudulent?
2. corrupt?
3. damaging to workers and savers?
If “They ARE sincere” – then why “a crash that would cause the Fed to wobble in its determination to crack down on inflation”
Looks like “They ARE sincere” in their determination to crack down on inflation AS LONG AS “there is no crash”
So if there is a crash – the Fed would hit the PRINT button damn inflation
Fed and “Sincere” don’t go together. Here you can replace “Sincere” with Honest, Integrity, Trust, Accountability, Principles ……
“if there is a crash – the Fed would hit the PRINT button damn inflation”
That is only logical, and right to do. A crash is deflation. As a regulator (like the one that regulates your body temperature), it must regulate to keep the variable within normal limits: it should induce inflation to correct deflation, and vice versa.
In a crash, zillions in debt (defaulted, unpaid), i.e., dollars, just disappear from the system. The money supply must accordingly be increased, or the patient remains in cardiac arrest and dies.
Phleep, the crash would help restore normal temperature. It’s running super hot now and it appears that brain is already fried at 107 degrees.
@ phleep- “In a crash, zillions in debt (defaulted, unpaid), i.e., dollars, just disappear from the system.”
——————————————————
Dollars do not disappear from the system because debt defaults.
not even one.
Dollar-denominated assets and liabilities disappear. “Dollars” are like “miles.” They’re a unit of measure. What are they measuring? Assets, liabilities, prices, etc., just like miles measure distance.
@ phleep –
“if there is a crash – the Fed would hit the PRINT button damn inflation”
That is only logical, and right to do.
———————————————————-
That is what the FED did post 2008. That was illogical and is why where we are today.
However, the FED appreciates your thinking and support.
Wolf, You kept giving Fed Free pass.
We are more than 12 months late in raising rate to sufficiently slow down the inflation. AGAIN, Fed is purposely LATE and SLOW in raising rates, to let inflation and asset prices run HOT HOT HOT!
You know why Inflation is still stubbornly high? because Fed rate is still way below CPI of 8% !
If a business can borrow at 6% rate and expand product lines to sell at 8% or 9% inflated price, guess what business would do?! Expand at all cost. Duh.
So this is back to economics 101 as Proven by Volcker. Raise the Rate to match the CPI at 9%, as what he did back in late 1970s. That way, business would no longer has monetary incentive to blindly expand.
But Powell and Fed plays DUMB today. Fed rate is still only 4%, way below the CPI. Yet they play stupid pretending don’t know why Inflation is still so high.
Oh come on. The simplistic model of setting an interest rate to match the inflation rate doesn’t work well in practice because shocks to the core interest rate cause huge ripples throughout the economy, especially the working class with loans to repay. Slow and steady (not that the Fed is particularly slow) is better. This will take years to correct so there’s no point in trying to do it in months.
Yes, they may be late. Yes, they probably should have seen this coming. That makes them fallible, not insincere, collusional, or criminal. Hindsight isn’t even perfect in this case because none of us can say what other calamities might have occurred had the Fed operated specifically to prevent today’s situation.
So I for one am not going to be an armchair-quarterback to the Fed.
@Brian,
Thanks for a bit of sanity. The “hang ’em high” crowd around here are just venting in ignorance. They have no credible replacement for what is here. The trajectory we are on is not ideal, but far from many possible ones that could have been worse, as we weathered the pandemic and aftermath, war in Ukraine and so forth.
Sean,
That’s little extreme but I agree he should be fired and sent packing. He has zero credibility. Once you lose credibility you can’t get it back. Its’ GONE! A new chair person needs to be appointed immediately to restore some credibility. Judy Shelton is my choice for the new Fed Chair. You can’t enlist the person that created the mess we are now in to fix the problem.
My problem is not the rate of interest rate hikes but the pile of debt that central banks still have on their balance sheets (and the slow pace it is being reduced). This is distorting price discovery in the markets.
Our national deficit is 30 trillion and the central bank has purchased a good amount of that.
So my problem is that by removing all this debt from the markets, the Fed is eliminating the price discovery that would happen in debt markets for US Treasuries, and thereby, enabling our country to sink deeper and deeper into debt. If there was actual price discovery, then the federal government would be paying a much higher interest rate to savers and would need to get much closer to a balanced budget. Cut out the wasteful spending and raise taxes on the richest portion of the population that pays absurdly low amounts of taxes (due to capital gains rules).
In many ways I see the low interest paid on Treasuries as similar to the housing market. With low interest rates home owners stopped caring about the price they paid for a home, and as a country we have stopped caring about the national debt because the interest payments were relatively low. But with more normal interest rates over an extended period of time, both the size of house payments AND the interest payments on debt would be a huge problem.
When the Fed backstops the whole Treasury market, the mechanism of risk management is thrown out the window and there is no price discovery, which is a mechanism to force fiscal discipline.
I also looked up the total value of residential homes in the US and saw it has risen to around 40 trillion. It struck me that to pay down our government debt, we would need to have everyone sell their primary asset – their home and hand over the money to creditors. I am NOT saying that will happen, but the relative size of a major asset class versus the debt load is truly mind-boggling.
We have adolescents running our economy (in both the federal government and central bank), and they have the American taxpayer on the hook for the future bills. Some day, this will actually matter.
A house around the corner from me just sold for 2.2 million. Who the hell would pay this much for a frame house built with the cheapest building materials known to mankind. The listing Realtor photoshopped the house to made it look like it was in the woods surrounded by trees, and ponds. A nature’s paradise.
But when I looked at the house yesterday, it was not in the woods but was sandwitched in between two other monster homes, and no backyard. The sucker that bought it probably never visited the house and bought it site unseen over the Internet.
@ gametv-
Excellent comment. All this focus on interest rates, which remain too low. The system was flooded with dollars, which supported debt expansion and low interest rates, asset prices and inflation. The sword is that people see house and stock prices going up, jump on the “get rich” band-wagon and push prices “forever” higher. This becomes a self fulfilling prophecy. The FED engineered this for years.
Dollars and credit need to be removed from the system. But how do you remove trillions? They are already there. It’s not all going away.
All this talk about credit markets freezing or seizing ………..
so what. Lenders who made bad loans need to re-negotiate.
No worry though, that is the cover the FED will use if they decide to pivot.
Between the 1970s and 2007 middle-class unionized earning power was crushed, taken as vast profits by Wall Street arbitraging the wage & production discounts made by moving manufacturing to the virtually slave labor, & pollution-control free reality of Chinese manufacturing. Our leaders built China’s current fiscal and industrial power by stripping down our own.
Wall Street profits were and are further supplemented by the massive flow of wage-crushing illegal labor (crushing benifit costs while crushing already crushed wage costs) here in the USA, causing vast sums of the once wealth of the middle & working classes to be moved up the social class structure from labor to owners.
We experienced this institutionally as the replacement of working class savings and loans institutions with, eventually, the hedge funds of the new owners of our nation’s, “working class,” wealth.
Those channels of wealth formation have ceased to exist for our corporate elite. Domestic labor has been fully crushed, and is now in fact subsidized. (Food stamps, school lunches, rental assistance, and much, much more…) Inflation will fully crush domestic labor back to 3rd world levels, where immigration policy itself it has not already done so.
The drawbacks of foreign manufacturing have in many cases begun to outweighed the benefits.
This domestic shift in the social ownership of our nation’s wealth, from the middle laboring classes to the top, is what fueled the series of speculative market bubbles from the late ’80s to the present everything bubble we are now floating around in. (exactly where, when, and what pops our current bubble are unknown, but pop it will…)
This generational shift in the ownership and circulation of our nation’s wealth essentially has removed the healthy, “productive,” domestic demand (and stability) our once wealthy unionized middle class provided our national economy and our society.
The inevitable outcome of such policies are ever increasing profits to the “management” classes as the purchasing power of the middle class simultanously declined. This presents a problem.
Middle class labor does not have the ability to be stripped down much further to continue providing growing corporate profits through that avenue, while domestic labor no longer possesses the wealth to generate sufficient demand to support these exhorbitant, unsustainable profits and asset values on their own, which were created by impoverishing the laboring classes in the first place.
This leaves us where we are now, in a position where profits and asset values can not be sustained by domestic middle-class demand, which was crushed into oblivion (into hedge funds…) bit by bit, by the immigration and offshoring/deindustrialization policies supported by both political parties, as well as the Wall Street that owns both parties…
I put the point of final transfer of the remainder of the wealth of the American middle classes (to our corporate classes) during the last bubble, the housing bubble in 07-08. What a long, strange trip it’s been…
Since then, the only domestic source of demand remaining to hold up the massive level of profits and asset values generated by Wall Street asset-stripping of our middle-class and country (while expanding markets!) became the provision of huge amounts of low cost debt, both to subsidize our now peasant-level (laborers) demand (consumption), as well as funding/supporting continued Wall Street speculation supporting these outragously bloated, and otherwise unsupported, asset values.
Irresponsible growth is a double-edged sword that has already cut both ways, up & down, destroying middle class wealth while making upper class profits & asset values dangerously unsustainable…
Without cheap debt and direct subsidies, there is insufficient earning power in our peasantized working classes, ie demand, in our now deindustrailized peasant society, to support profits/asset values anywhere near their current levels (which were pushed to these heights of profitability and asset valuation by impoverishing labor through mass immigratrion and offshoring), let alone supporting the standards of living and quality of life associated with, “America.” Where will, “balanced books,” (which are coming) bring us?
There is no “there,” there, once we strip away low cost debt funding for these speculative markets & asset prices, let alone for subsizing peasant labor survival & basic consumption.
There is no middle class demand to fall back on once debt is curtailed, budgets are, “balanced,” and interest rates provide reasonable returns.
This means our political economy is going to get a lot ugilier in the near term as the long term economic and social consequences of the (60 years, +/-) policies of mass crimigration combined with offshoring & deindustrialization have given our economy nothing to fall back upon in this impending crisis.
I call these policies of very, very, irresponsible growth driven by our corporate establishment as; “The Corporate Growth Machine of Death,” and we are at the end of its ability to sustain itself on its current methods of operation. It’s over.
Wisdom would have seen us eliminate immigration and curtail offshoring after the crisis of 2007, to rebuild domestic labor wealth & demand, to rebalance the circulation of American wealth through our society & economy. We did not.
Instead, we went, “pedal to the metal,” with various styles of easing, as well as ever-increasing immigration and offshoring, up to the current point of our economy and society blowing up. Imploding? Imploding into a blow up?
I see the times ahead of us very akin to those of the past, when a similiar concentration of wealth and power formed by creating an industrial slave class during the mass immigration of the 1880s, capable of stripping our national resources and concentrating our nation’s politial and economic wealth and power in the fewest hands possible, much as we have seen in today’s world.
I see these growth patterns of the 1880s and early 21st century playing out in a very similiar fashion, after evolving in a very similiar fashion.
Which brings us to understanding that our probable future hearkens back to the 1880s, when massive irresponsible growth ultimately brought us into the era of the Dust Bowl and finally the Great Depression ushering in such things as the WPA, CCC, & NRA, and ultimately WWII.
As much as technology changes, motivations and behaviors of large groups of people remain very much the same. But on a much larger scale of magnitude today, with our vastly increased populations and much more powerful technologies have the potential for much greater destruction human & natural.
Todays, “Dust Bowl,” is going global, while markets conditions are lined up for The Greatest Depression Ever, as ever increasing social-economic-&-political stresses are threatening to produce more extreme characters than those that rose in the ’30s, and led us into WWII.
Today, world war has a much better chance of starting with a nuclear exchange, rather than ending with one, as did the last one. This Dust Bowl will never end…
Our policies of the last sixty years assures chaos during the next sixty, if not for a very much longer time.
Back to the Future, once again…
“While 12-month core goods inflation remains elevated at 4.6 percent, it has fallen nearly 3 percentage points from earlier in the year. It is far too early to declare goods inflation vanquished, but if current trends continue, goods prices should begin to exert downward pressure on overall inflation in coming months.
Measures of 12-month inflation in new leases rose to nearly 20 percent during the pandemic but have been falling sharply since about midyear…as long as new lease inflation keeps falling, we would expect housing services inflation to begin falling sometime next year. Indeed, a decline in this inflation underlies most forecasts of declining inflation.”
Powell set expectations in the market that inflation is declining and that the FED is cutting back on the size of their rate hikes because of this. The market has decided that it’s party time, because Powell was giving them little nuggets of good news that inflation is waning. It was intentional. He likes this speculative bubble he has created.
Depth Charge,
You have removed what Powell said was “the most important category for understanding the future evolution of core inflation”: inflation in “core services less housing.” See chart.
“core services less housing” accounts for over 50% of core PCE — and you REMOVED IT.
And it’s driven by wage increases… “Because wages make up the largest cost in delivering these services, the labor market holds the key to understanding inflation in this category,” he said. And the labor market is way too hot.
That’s half of core PCE, and right now, there is nothing that will make it slow down. And that’s why Powell made a big deal out of it. How could you ignore it?
It was not intentional, Wolf, I was just adding a few of the things which I thought led to this insane rally. I mean, you can’t deny there’s stuff in there that led to this rally, can you? It was a 1,000 point move on the DOW. I am trying to understand WTF is going on here. People like myself are SICK of the speculators.
Why be sick of the speculators? Somebody, probably speculators, has paid me option premiums equivalent to 1% of my miniscule net worth this year. And I’ve never been assigned. Cash position just keeps going up as options expire worthless or close them out profitable. Speculate on. I don’t have a problem with speculators. They are great customers. I have a problem with fiat currency and an unconstitutional banking system.
And as you can tell, I like these rallies. My BIGGEST FEAR is that we have a crash and that credit markets seize, and that the Fed buckles under that pressure and reverses course and starts the whole shitshow all over again, which would be catastrophic.
It’s hard to have a crash with all that liquidity still floating around out there. But once that liquidity gets drained some more, a crash or some kind of market event might become more likely. With inflation still surging, and the Fed trying to stop a crash, that would be the worst-case scenario.
I agree with you here, Wolf, I’ll take DOW 50,000 over more QE. But my concern is that the cashed up speculators from the stock market and crypto just juice everything else to the hilt. We’re in the most sickening speculative bubble in history. For crying out loud there are 10 year old used SUVs with 150,000 miles asking $35,000. This is insane.
I hate Jerome Powell and the FED with a passion. I hate the system now. It’s failed everybody but the speculators and the top 5% or whatever. That’s why you see me calling for it to just melt down at this point. Everything is divorced from fundamentals. Pricing has no basis in reality. Zombie companies with no earnings set house prices for working families as they buy it all up. It’s insanity.
“Zombie companies with no earnings set house prices for working families as they buy it all up. It’s insanity.”
It’s a tragedy and a stark reminder that unbridled capitalism doesn’t work –it’s a zero sum game. There is wisdom in “from each, according to his abilities…to each, according to his needs. Basic necessities have to be provided to have a healthy, reasonably crime-free society of people who work, have homes, eat, stay warm, raise families with kids who can go to school and the doctor when they are sick. Capitalism doesn’t provide any of that for the have nots–only for those who can pay–and the prices of everything in this everything bubble are way beyond the reach of most people. Capitalism as we know it is breaking global societies, before our very eyes.
Amen Nathan!
Sorry, Nathan, but Marxism doesn’t work. It defies human nature which is fueled by “selfish self-interest”. Capitalism needs guard rails, in spite of the lunacy of the Rand libertarians. The guardrails are strictly government imposed, otherwise, companies will not limit themselves from the goodness in their hearts.
Get a fresh cup of coffee.
@ Depth Charge – ” Pricing has no basis in reality.”
———————————————
Sure it does. The reality is a corrupt FED/Money lender system that had injected trillions of new dollars into the system, making your saved dollars worth much less and driving prices. It is working as intended, with a few hick-ups along the way.
The design is for most to be wage and debt slaves. Providers of service, and useful cannon fodder if needed.
@ HowNow –
Why does the alternative to Capitalism have to be Marxism?
Get some better coffee.
and less kool-aide
Our economy is set up to make billionaires richer, and for other people to pick up the table scraps along the way. It is not set up to improve the living conditions for the largest number of people. I am not talking about socialism, that doesnt work. I am talking about intelligent capitalism. Capitalism that rewards hard work and entrepreneurship, but has a taxation system where the rich pay a higher percentage of all their gains (including capital gains AND unrealized gains). Deflation would actually be a great thing if we would allow it to happen. Reduce the cost of living for everyone. The tech industry has been deflationary for its whole existence. Better products at lower cost. Economists lie about deflation being bad. It is bad for corporate profits and for investors, not bad for an economy, if it is based on increased competition. Deflation would also be good for reducing our over-consumption problem, which is good for the environment and future generations. Deflation would actually encourage companies to become more efficient.
The economics profession is run by people serving the interests of the uber-rich.
To those talking about capitalism, please note that we haven’t tried it yet. Money printing and deficit spending are not capitalism. Those tools have more in common with socialism.
If we had a little more capitalism and allowed people to succeed or fail financially without bailouts, money printing, PPP programs, etc., we wouldn’t be in this mess.
Government housing subsidies should be eliminated. 3.5% down-payment government guaranteed loans as high as $1M makes ZERO sense in a housing price bubble.
Nathan, I hope that is sarcasm. We have crony capitalism which is not the same as unbridled capitalism. If you are serious, you should read Mises.org or Ron Pauls’s writings.
– There is still way too much complacency in the markets.
Negative sum.
Yes, it’s easier for Powell to stay the course with markets doing well. But a crash can happen at any time. When the market is up a lot a crash could also be bigger. These rallies will not reduce risk, I think.
The Fed should try to guide markets lower. But probably that’s too much to hope for. A yoyo market is good for Wall St.
Things have gotten pricey again.
Berkshire Hathaway is 1.55 x book.
Long term average is around 1.35. It tends to get to 1.0 book in recessions.
A lot of dividend stocks pay less than 1 year Treasury.
Earnings yield on SP500 roughly 5% with 2 year Treasury roughly 4.5%.
People taking a lot of risk to be on doorstep of recession.
Would a .75 increase have caused a crash ? It probably would have signaled the Fed was still serious about fighting inflation. Perception
matters when inflation is still running hot.
Wolf, I agree with your premise. I am curious though, who/what was responsible for the buying yesterday? It started before Powell really got going, and it bought practically everything. What buy program would be coded to “buy all the things”? Makes no sense to me and given the scale and breadth of buying I find it difficult to believe that this was more than just the Goldman’s, hedgies etc.
– No need to fear for a crash right now because a crash has always been preceded by falling of both short and long term rates. Long term rates already seem to have peaked (for this year ???).
Everyone or most get a wage increase in the new year starting January the 1st so core inflation will rise not fall in the coming months. We’re already in a wage price spiral.
Agreed about there already being a wage price spiral. It’s hard to believe that the same guy (Powell) who helped create this mess is going to be the one to fix it.
Above all else volatility is the best money maker for hedge funds, this whiplashing is perfect for them. The bond market should know better though.
I see nothing positive in Powell’s “Dovish” show today. Not that long ago, I was jokingly teasing few older colleagues of mine, that government might tell them to postpone their planned retirement temporarily for “good of the country”.
Then i heard Powell talk about housing prices and stock market gains contributing to early retirements, shortfall of labor force and not seeing any of retirees coming back to work…
But Pivot it is.
The Fed and the USGov have proven they can expand the USD supply (m2, m3 etc) by 40% in a year with zero political consequences. They may have paused* for the moment, but my guess is they are eager to do it again. So any interest rate below 40% is dovish.
*I say they “may” have paused because they stopped reporting M3. Does anyone really know how much they print? I doubt it.
@ Nissanfan,
“But Pivot it is.”
It is not a binary. it is a series of adjustments, calibrations, as feedback happens. It is the essence of regulation: to adjust in real time to keep something toward being within target limits. It has strayed a lot, I admit. But the circumstances did that, with, like, a pandemic.
I’m just starting to see move in specials in Phoenix. Just a bit. This is in new builds, SFR built to lease subdivisions. Have to wait for a couple of months into the new year to see if this goes further.
Mass psychosis is a hell of a thing to withness as shown today. The mental gymnastic require by the market is quite funny…to cheer this much at .50% hike anticipated in Dec and we end up somewhere around 5% FED funds rate is kind of similar to losing your brakes heading towards a cliff but now the car slows a little bit so you party like it’s 1999…ugh duh your car is still going to plunge towards the cliff..
Oh well, don’t care what the market does, already moved all my 401k to bonds and less risky allocation, crash, go up, doesn’t matter. As long as FED doesn’t let up and let this housing market crash hard, then Pow Pow can see the reverse wealth effect playing its role in fighting inflation.
LOL, it’s not mental gymnastics. Wall Street has been loading up on stocks for the past month or so. This was just another excuse to panic the herd into not *missing out*. So, now they will sell at a nice profit and begin again.
The holiday period is thinly traded, likely whipsawed higher. The next major move comes after new years. Another leg down? We’ll see.
Tax-loss selling is now in the rear-view mirror. This is the beginning of the Santa Claus rally. Typical.
The real hits to companies from these rate increases has yet to show up in cost reductions and earnings. It will soon. It’s still not an investable market imo.
I think the Jerome Powell pulling his hair out pic would be appropriate here.
haha much like Jake Paul, market is fighting the FED alright…market is like Jake Paul calling out Powell out for a match…quite funny and frustrating to watch, great time for now for dip buyers and speculators though
I think the whole picture should be shown …..
So we can see his $800 shoes on the throat of the average American ….
He’s not pulling his hair out. He’s just applying hair gel, for the next Fed meeting ‘party’.
LOL One of Wolf’s favorite charts, the Weekly Economic Index (WEI), shows a steady march towards zero.
So that probably is just hair gel that Powell is applying.
Heard Benjamin Tal say that October showed 0% growth in Canada.
I commented back here on the day the market bottomed in October that we likely had just hit a multi-month bottom. Well, here we are – almost a 20% rally in 1.5 months (nearly 600 points from 3500).
I will repeat what I said back then: the market does not make moves over the short term based on fundamentals.. It is based on sentiment and will often move in ways that are completely illogical to the facts.
Don’t call the markets crazy or say they are all manipulated like it’s a big conspiracy. It’s not. Understanding how the waves of sentiment work, and their relationships with each other, can explain a lot about why the market does such inexplicable stuff. It’s mass sentiment, illogical and emotional, but surprisingly predictable.
The spike today was like the opposite of that move in December, and we are now selling and moving to cash. There is a good chance we are close to another swoon down, but we could be in a whipsaw environment for months that could take us all the way to 4500 before the next major move down begins in earnest.
“surprisingly predictable”
Only if you predict a 50% probability of rising and a 50% probability of falling.
AK, I’d say you are 100% correct.
re: “the market does not make moves over the short term based on fundamentals”
LOL. Another Elliott Waver. NO, the fundamentals precede the technicals’, always.
–Michel de Nostredame
The stock market runs on emotion, and has convinced itself the worst is over. The bond market on the other hand is what dictates the direction of the economy, and it screaming recession, as is clearly seen in the worst yield curve since the 1980’s.
What the FED says is of no meaning. Only those with short memories put any credibility at all in what the FED says…….. Have you forgotten when they were telling the world that the markets were much safer and stronger and that we would never see another financial crisis in our lifetime?
Anybody want to put some money on that now?
The FED is the ultimate Wizzard of Oz, taking credit for things that it really has no real control over….. Other than what people choose to believe it has…..
@ Jdog –
Appreciate the insights, but the FED has lots of control. They have suppressed interest rates and pushed asset markets and bailed out select beneficiaries for many years.
Perhaps a reflection of how unhinged markets are with reality that they found today’s speech as dovish.
Agree with you that the Fed is sincerely trying to fight this. But I guess they conditioned this response by being supportive for nearly 15 years. Now no one believes them anymore when they act hawkish :)
The stock market suffered a couple of recent and rare event blows – missile landing in NATO territory and unrest in China. While potentially monumental, both events caused exaggerated moves down, at least based on developments so far.
This nervousness caused the market to pause until Powell had spoken, out of concern for more unpleasant surprises. What he said was generally consistent with recent comments. Investors and speculators responded by returning money to stocks that might otherwise have been retained, had those events not occurred.
Sometimes, the closure of a scheduled event, rather than its output, exerts a greater influence on trading. Yesterday’s rally was not easy to predict, but it is explainable.
The markets are driven to some extent during outlier moves like this by forced buying due to the elevated proportion of options (calls in this case) and covering shorts. The move happened within 1-2 hours right?
It took 40 years to get here and as a result it is going to take a fair amount of time to unlearn behaviors. Their is no pivot that I can see. If the Fed raises rates at a 75 bps trajectory and breaks the system ie sends the errant brat called the market to the ICU then it will get its fix and learn nothing. The reality is this can’t be over in a few months time and will likely take 2 more years. If we want inflation to abate we need to get rates above the inflation rate and then some. That can’t happen overnight kids. We have just finished Scene one Act two or three. Its a multi Scene play and will be worse than 08. We are only in
December of 06 so I would keep my powder dry and buckle up if I were thee.
Depth Charge,
Please carry on. If only more people had the intellectual understanding and good sense to share your righteous anger, we would have more chance of delivery from oppression.
+++++ANGER
Depth
I say carry on, but don’t leave out the s$um in Congress who are always in the Spend, Spend, Spend, mode which requires monetization by the Fed.
As you say, sounds pretty hawkish, not a hint of relaxing and yet the markets soar. Maybe their AI algorithms, not having encountered this situation before, are misfiring and the masters of the universe haven’t noticed yet, too busy quaffing foie gras in the local 1000 dollar a head restaurant.
I do find it ironic that somehow “wage growth” needs to be “consistent” with 2% inflation. Pretty sure the entire point of inflation, especially when “controlled” at 2%, is to keep the worker mule continually chasing the carrot attached to the stick. “Wage growth”, even in normal times, is a farce.
And what is the difference between exponential “growth” at 2% a year and 5% or whatever a year less the doubling time of all prices?
Next, how do infinite exponential “growth” work in a finite world with finite resources?
If stability is the goal, fixed amount of money is the receipt. With the following inconvenience for rentiers that a monetary system with a fixed amount of money do require that there is no interest on money.
My real wage growth has been negative for 20 years. My answer? Work hard, do well, save. Don’t look for some celestial daddy to materialize. Life is hard.
“to keep the worker mule continually chasing the carrot attached to the stick.”
So you would rather do what, put your feet up, on a beach, and be catered to? What is your alternative? Since when do you not have to pull your weight? the generation with good retirement plans went to war.
Aside from the upcoming 50bps interest rate increase in Dec, QT is running as scheduled at 95B/month, is that right? Or is the FED still ramping up to that number? From what had been telegraphed months ago, this all sounds like the FED is doing exactly what it said it was going to do.
“…this all sounds like the FED is doing exactly what it said it was going to do.” Unfortunately, the FED doesn’t have the cleanest record of sticking to their guns.
You can always cherry-pick pieces of the data.
Dec 01, 2022
Why does the market to love every Powell ralk?
1) The Fed continues to not ask for Fiscal spending restraint.
2) With no talk of capping or reducing interest on bank reserves, the banks look forward to even more risk free catnip.
3) The sum of the Fed’s current actions and outlook support an environment of continued negative real interest rates.
4) As I commented on Nov 10, “Today’s moves are a thundering endorsement by Mr. Market of both stocks and bonds anticipating the return of the Fed Put.
Mr. Market believes that the Fed will return to a 0% Fed Funds Rate and expansion of its balance sheet as the economy slows, unemployment grows, credit declines, Treasury liquidity continues to tighten, and Fiscal spending rages on in 2023 (even with inflation somewhere above the 2% target).
Is Mr. Market correct?
Impossible to say.
Time will tell.”
The real question is when will the stock market ponzi implode like the cryptocurrency market did? Both are based on the greater fool theory and nothing else at this point in time. Anyone with an ounce of brains can look at a chart of the DOW since 1993 and figure it out. Nothing but a pure ponzi but when will the ponzi end?
I’m the real Tony
Well, actually, to not confuse things, this Tony used a different handle. I’m the real thing also.
Nebada 22 said: “2) With no talk of capping or reducing interest on bank reserves, the banks look forward to even more risk free catnip.”
———————————————————–
excellent point. graft in plain sight.
Excellent analysis, Wolf! Thank you.
Again, Wolf Richter has dissected the truth, reported the full story and added his insightful wisdom in predicting the future. I delight in the mass misinterpretation depicted in the blistering rally today, which is historically consistent with previous bear markets and particularly appropriate in this super bubble of all asset classes. It gives us the opportunity to profit as the Fed driven flood of cash moves into this sucker rally.
Wolf Richter’s extraordinary understanding and teaching in terms that even I can understand is well worth our respect and support.
Profit with confidence.
The Combination of margin and “playing the gamma game” has turned the Stock market into the MMT – the money making tree. Since some institutional Outfits have figured out how to play the gamma game – buying options and forcing the market makers to hedge themselves by buying the underlying Stock – it’s free money again for those who know the score. Just look at the amount of D-0 and D-1 options traded.
This is enabled by the same banks the Fed is supposed to regulate.
The Fed is a joke.
a disgusting joke. but a source of wealth for those on the inside.
Yep, still work to be done…
Latest NFCI Release
Index Suggests Financial Conditions Loosened Again in Week Ending November 25
The NFCI edged down to –0.27 in the week ending November 25. Risk indicators contributed –0.04, credit indicators contributed –0.13, and leverage indicators contributed –0.10 to the index in the latest week.
The ANFCI was unchanged in the latest week at –0.18. Risk indicators contributed –0.03, credit indicators contributed –0.08, leverage indicators contributed –0.08, and the adjustments for prevailing macroeconomic conditions made a neutral contribution to the index in the latest week.
@ Wolfgoat –
NFCI ?
ANFCI ?
Nothing goes to heck in a straight line. So far. And thankfully.
Brandon…”Nothing goes to heck in a straight line. So far”…
….but going in the other direction…..Since Oct 13’s bottom. Up ~20% in just over 6 weeks! How long did it take from last year’s highs for the markets to FALL 20%? A HELL of a lot longer…
After yesterday’s melt-up, I decided I’ve had enough pain using SQQQ options (I made a bunch most of this year), but the last 6+ weeks I’ve decided it’s time for a Holiday break.. and let my few longs to run free :-)
So if capitalism sucks, and socialism sucks, where does that leave us?
I think the collapse is in leadership. Congress won’t raise taxes, which fights inflation and income inequality at the same time. God forbid the Oligarchs pay more taxes. Thank God for Crypto, which is doing a nice job of eliminating real money from the economy. But for tax cheats it’s still a playground eh?
Crypto hasn’t eliminated any real money from the economy. It has only transferred some of it.
perp,
You put your finger on the crux of our problem. the New Deal was a path between unbridled capitalism and socialism, but the lynchpin was taxation. The gov has now been bought off in that respect, so we have a fiscally weakened and debt-ridden government (with still plenty of lousy programs too), and open pastures for oligarchs. Ultimately that is the worst deal for almost everyone, as the lower half fall into disrepair and social chaos.
People here framing it as capitalism or socialism as a binary are completely off the mark for what actually works, which is a hybrid, that softens the harsh edges just enough, without destroying incentives to achieve and build wealth. That takes a LOT of work (done badly in the 1960s, unraveling the social contract). But if the revenues aren’t there in a sane way, none of it will happen. It will be soylent green.
The speculators are high risk people and I agree, if the system has to burn down to drain these people of their gains, so be it. They’ll keep rolling the dice until it’s gone. Would love to see the markets fall so bad that these people step out with nothing and never come back. The US produces far too little goods for it’s size and makes it next to impossible for small entities to succeed. The white collar world earns far too much relative to the necessary labor on the blue collar side. Anything to bring this back to reality is a good thing in the long run. If we want affordable housing, affordable locally produced goods, and the end of self-destructive overconsumption driving society and the planet into the ground, then we need a once in a lifetime crash.
Negative outlook? Yes. This insanity needs to end.
@ Digger Dave – White collar workers don’t want to hear that, nor some blue collar workers. They have been able to throw a few dollars into the markets, and now believe they are Capitalists.
Stock market must not believe the Fed. If Powell does what he says he is going to do then we would go back at least to fundamental values on the stock market which is in the 1000 – 2000 range on SP500. That’s on a price to sales or just a simple regression to 100 year trend.
One thing that is a powder keg is there are a lot of assets that are not marked to market in private equity world. If Powell holds rates at 4% plus for all of 2023 then these things will get marked from fantasy straight to zero sort of like Sequoia marking down FTX. A lot of these private equity fantasy marks are in pension plans.
Maybe market knows that when pensions start blowing up, Fed will pivot again.
Nobody knows the future so you have to restrain yourself from going all in on any one outcome.
I will not get too bullish til Buffet starts spending down his $110 billion cash stash.
I don’t think there is need to over-analyze Wolf’s point here. So far, at this juncture of inflation and the Fed hiking, the stock market is amazingly still just off of highs. There is no real substance and there hasn’t been for years, it’s all sentiment as someone mentioned above.
I agree, Old School, it’s crazy to leave pensions so overweight in the stock market, but the markets would dump without them, and sadly with no other place to go markets have to be rode out apparently.
If inflation is 7%, 4 or 5% Fed rate is still negative real interest rates and unnecessarily stimulating. We’ll see over the course 2023, but it may take a recession for real interest rates to turn positive. I watched the Powell talk yesterday and he seems overconfident that inflation will moderate in 2023.
I think the problem is Fed medicine is going to be felt mostly in housing market. A lot of layoffs coming in for loan officers, realtors and anyone making a living building homes.
Anti BB : 137.69/ 147.38. Yesterday closed above the Anti.
Thanks for the analysis Wolf. I read the MSM “pivot” headlines, and tried to align it with the CME futures on rate increases, and couldn’t. Thanks for clearing it all up for us. CME is still forecasting the same rate increase (50 bp or 75 bp) which lines up with what you are saying.
And Powell’s decision basically boils down to services and the labor market. Not to oversimplify or anything.
I think there’s a chance services inflation might moderate, at least somewhat. My observations tell me that the labor force is slowly improving right now – the number of 16-64 workers “with a disability” has dropped from its all-time high, which should reduce labor market tightness. If this trend continues, Powell might start to relax. (If the trend doesn’t continue – Powell will probably NOT relax). The size of these changes dwarf the layoffs that have been announced. More clues tomorrow.
Then again, I also thought that crude would rally post Nov 8th, because Biden clearly wants higher oil prices, and that didn’t happen. My energy stocks did well – but crude, not at all.
We are living in interesting times.
So, the Fed is sincere unless there is a crash?
Bingo
A crash in stocks (crash = fast and a lot, not -30% over 12 months) puts huge pressure on the Fed. But where it really gets dicey is when the credit markets freeze up. When credit markets freeze up, the Fed will step in. It may do so with repos, or put rate hikes on hold, or cut rates, or some combination. Credit markets freezing up is a very serious thing in an economy that runs on credit.
and why would credit markets freeze up with Trillions of dollars floating around out there, bank reserves high, and a loaded repo facility?
Credit will be provided at the appropriate interest rate. No?
and isn’t that what this is all about? to get rid of that easy money that drove markets and distorted market pricing and risk taking, favoring financial market engineers like private equity over actual productive work?
How do we tell when “credit markets freeze up”, and not “that’s just where interest rates need to be”?
With a 7% CPI that’s recently been north of 8%, I could easily see 10-15% interest rates as “just in the range” to compensate the investor for the time value and risk, but I keep being told that’s “the market froze up”.
“The credit markets have frozen!” translates to “Oh no, risk is being priced accurately!”
From the experience of GFC it is very clear that central bankers will never let credit freeze. And I think that is also the right thing to do.
I guess the problem during the GFC rescue was that central banks provided liquidity without good collateral. Maybe it was necessary to prevent total collapse. But that was not QE in my opinion. It was just liquidity creation.
Real QE started after the financial crisis to boost growth…which it never did because QE went into speculation. QE in the pandemic was also perhaps the right thing to do to prevent total collapse of the economic system. But QE after the economy had recovered was a big mistake.
I think the Fed understands that QE is no longer an option and QT is necessary. So unless credit markets freeze, there is little chance QE will ever be tried again. And if QE were to return to unfreeze credit markets, it will likely be temporary as Bank of England has proven.
But the market is conditioned and certain of that the Fed will provide unlimited liquidity till money becomes worthless. I think that assumption will turn out to be fatal and will eventually be the undoing of the market.
But beliefs have a long half life. So this may well be a long struggle. Because unless it is accepted that QE lifeline is over, the stocks will continue to be overvalued no matter what.
I think the bigwigs have finally accepted that infinite growth is impossible, and economy and population must shrink before we destroy the environment. If that’s the case, it will be a painful stagflationary spiral for decades. Politicians must print to show they’re doing something, but will let the economy languish and standard of living decay.
Are you saying the Fed did not understand that “Credit markets freezing up is a very serious thing in an economy” – when they were printing like no tomorrow, calling inflation transitory, piling QE upon QE since 2009, intervening in the market at the drop of the hat, cutting rates and blowing an “Everything Bubble” and not allowing discovery of price of capital and pegging it at ZERO for ever?
It is just that inflation has bit the hands that has its hands on the printing press to coddle the markets.
Printing cannot cease credit markets. It never can.
The problem with loose monetary policy is that it encourages risk and debt. When the environment changes (as it has now) the debt cannot be renewed and causes solvency concerns. Debt paid or defaulted results in reduction in assets of the financial system which can trigger a contagion of subsequent defaults. This is what happened in 2008.
So credit market freeze will result from stopping of QE not from QE.
We’re in a credit bubble first and foremost. I’ve never heard of hair-of-the-dog cures working.
More specifically, it seems to me the FED is just trying to apply band-aids to continue with the status quo instead of fixing the structural issues, which is an economy built entirely upon speculation via cheap money, and fantasy valuations that have absolutely no basis in reality.
I love common sense. And Wolf has more than most.
Wolf–This is going to continue for a while as you stated. We still have to sop up huge amounts of liquidity. There is still waay tooo much out there, especially on Wall Street, what with folks still buying on the dips, etc. Forty years of too much money creation and ever lowering interest rates gave us what we currently have–a chronically diseased body. Powell is–so far–doing a good job of attempting to gradually rectify, purify & purge, this corrupt system. I wish him luck!
phleep,
“That is only logical, and right to do”
The logical and right thing to do in 2009 would have been not to go in for QE forever.
The logical and right thing to do in 2020 would have been not to distribute money in 2020 as if it grows on trees.
Having done that and blown a bigger bubble what you are suggesting do the same thing again and blow an even bigger bubble and then rinse repeat.
Pray tell me when do we stop?
In Powell’s speech and Q&A yesterday, when talking about the causes of inflation, he said nothing of the FED’s money printing nor the fiscal stimulus from CONgress. He blamed it on “supply chain” problems.
If a company normally sells 100 widgets a week to their customer base, but the FED drops a zephyr of liquidity on the market, and CONgress sends out free money to everybody in town, and the company subsequently has 1,000 orders and cannot fill them due to limited production capacity, is that a “supply side” issue? Hell no. Powell is a fraud.
“Powell is a fraud.”
You got that right. He has no choice but to lie. House of cards will implode in nano seconds if our overlords start telling the truth.
Dr Havenstein, the head of the German Central bank in 1923, said the same thing Powell said. When asked why he kept printing money without anything to back it up he said
“We had to, or there would have been civil unrest”
and
“Money printing wasn’t the cause of the inflation”
It’s kind of common sense. You give the president the world’s most powerful military, he is likely to abuse the power.
You give a Fed president the ability to print wealth, he is likely to use it.
It might would have been wise for Congress to have tied the Fed chair to the Taylor rule unless he comes back to Congress for a vote to approve extreme policy.
“These rallies will keep QT going, and they will keep the rate hikes coming, and they will keep the Fed focused on inflation instead of having to deal with a market meltdown”
Exactly.
IMHO sharp market crash is one of just two thing (US entering the war is another) that can undermine Federal Reserve’s ability to jack up interest
rates to a level that will strangle inflation. As far as markets are able to
stage periodic rallies, Federal Reserve’s hands will remain free to fight
against inflation.
This continuing attitude of associating the Fed with the market is the biggest misdirection play of all time!
The Fed is paying almost as much interest to the banks as they are letting assets run off the balance sheet. They are injecting liquidity into the markets on one hand.
Nah, they’re also EARNING interest on their $8.5 trillion in securities. So does that mean that they’re withdrawing liquidity by getting paid interest on their $8.5 trillion in securities holdings???
I have a large bleeding wound, and it’s been getting bigger lately. You would think that’s a bad thing, but it’s actually good because it gives me an excuse to put even more band-aids on it. I’m playing 4D chess here!
Please don’t ask for a tran$fusion!
I will not ask for stitches or a transfusion. Those things would actually solve the problem, and then I wouldn’t have a reason to apply band-aids anymore. The band-aids are the most important thing here, right?
This is a great read and brings clarity to otherwise insane investor sentiment and obsession with a FED pivot. FED uber hawkish and the QQQ’s surge 4.1%. For the SPX to be 4,076 today is utterly ridiculous. To me this seems so reminiscent of 2008-09. My forecast is a 1,000-point drop in SPX between now and mid Jan.
There remains cause for concern. Through a series of multiple and variable lags, consumer prices follow asset prices. When the dollar loses purchasing power, it’s first apparent in asset markets. But what happens in real time, tick-by-tick asset markets slowly filters through into the much slower moving markets of wages and consumer prices.
This sequence is often so slow and gradual as to escape notice, but was vividly illustrated illustrated over the past couple of years. When the Fed unleashed its monetary explosion in 2020, asset prices – bonds, stocks, commodities – responded immediately by soaring. This was followed over a year later with alarming consumer price inflation.
So the recent recovery in stocks, mostly a consequence of a weak dollar, represents a setback in progress reining in consumer price inflation. If it doesn’t soon reverse, neither will consumer price inflation.
ZIRP sponsored by the Feds created this Monster. Many have prospered over the past 12 years of the all you can eat buffet. Wall St. And the world expects nothing now but good news 24/7. Those 54 and over dropping out the Rat Race only proves their is vast amounts of wealth in retirement funds. It would not surprise me to see the S&P @ 4800 before December 31st. It’s all imaginary paper until you cash in or sell. Baby Boomers are the only ones whining about inflation. 50% of Americans don’t on stocks. Most have never thrown a manual rail switch, road a train for 12 hours, or worked a job without being off for the holidays. Deckhanded a 36 barge tow from St. Louis to New Orleans. Loaded a Panamax Vessel with 60,000 M/T or grain out of Puget Sound. Most folks in America know absolutely nothing about the depth and breadth of the US supply chain. It’s sad to be 50 year old Gen Xer seeing that there is no one coming to take your place. In the real economy and boots on the ground America hell is coming to breakfast. I’m glad the market creates demand, labor will dictate their price going forward or shutdown supply chain.