DOW TUMBLES 876 POINTS AND STOCKS ENTER BEAR MARKET ON WORRIES OF DRASTIC RATE HIKES:
US stocks have plunged into a bear market as Wall Street investors grew increasingly nervous about the prospect of even harsher medicine from the Fed to take the sting out of inflation.
The Dow (INDU) sank 876 points or 2.8%. The Nasdaq was down by 4.7% and has tumbled more than 10% in the past two trading sessions.
The broader S&P 500 fell 3.9%. That index is now more than 20% below its all-time high set in January, putting stocks in a bear-market.
Recession fears mounted after Friday’s miserable Consumer Price Index report showed US inflation was significantly higher than economists had expected last month. That could make the Federal Reserve’s inflation-control efforts more difficult.
After raising rates by a half point in May — an action the Fed hadn’t taken since 2000 — Chair Jerome Powell pledged more of the same until the central bank was satisfied that inflation was under control. At that point, the Fed would resume standard quarter-point hikes, he said.
But after May’s hotter-than-expected inflation report, Wall Street is increasingly calling for tougher action from the Fed to keep prices under control. Jefferies joined Barclays on Monday in predicting that the Federal Reserve would hike rates by three-quarters of a percentage point, an action the Fed hasn’t taken since 1994.
And the hits just keep on coming! Are housing and jobs markets bubbles about to pop?
If so, we can thank the cheap money that usually create asset bubbles — and point again to a Federal Reserve dissenter as a prophet. Fortune warned this morning that housing prices in as many as 40 markets could sharply drop over the next year as stagflation necessarily turns into recession. It won’t create as much damage as the housing-bubble pop did in the 2008 financial crisis, but it will leave the most recent home purchasers without a seat when the music stops:
* * * * * * * *
This might not matter in terms of bubble-popping if flipping and speculative purchases haven’t comprised a good portion of this bubble. If these prices have gone up on the power of actual homesteading, then a drift downward in valuation shouldn’t have too much of an impact on financial institutions. Homeowners can still pay their mortgages, at least as long as they maintain their current income levels in a recession. An “overvalued” market isn’t a catastrophe in itself, except for those who want to sell their home and have lost their positive equity in it.
However, the continuing rapid inflation pace will force the Federal Reserve to step up its monetary tightening by raising its interest rate. They’re already planning a series of 0.5-point increases this year, and last Friday’s 8.6%/1.0% consumer price index (CPI) result will likely spur even more intervention. If tomorrow’s producer price index (PPI) remains in double digits, you can probably bank on an even more aggressive approach to the Fed’s interest rate and money tightening. That will tighten the leash on business investment, and that will have an enormous impact on a jobs market that’s already looking a little shaky, according to Goldman Sachs:
Flashback: Milton Friedman’s Revenge:
Milton Friedman, whose empiricism led him to embrace free market public policy, was the most influential economist of the second half of the 20th century. But Biden has a weird habit of treating Friedman as a devilish spirit who must be exorcised from the nation’s capital. For Biden, Friedman represents deregulation, low taxes, and the idea that a corporation’s primary responsibility is not to a group of politicized “stakeholders” but to its shareholders. “Milton Friedman isn’t running the show anymore,” Biden told Politico last year. “When did Milton Friedman die and become king?” Biden asked in 2019. The truth is that Friedman, who died in 2006, has held little sway over either Democrats or Republicans for almost two decades. But Biden wants to mark the definitive end of Friedman and the “neoliberal” economics he espoused by unleashing a tsunami of dollars into the global economy and inundating Americans with new entitlements.
The irony is that Biden’s rejection of Friedman’s teachings on money, taxes, and spending may bring about the same circumstances that established Friedman’s preeminence. In a year or two, the American economy and Biden’s political fortunes may look considerably different than when Janet Yellen blurted out the obvious about inflation. Voters won’t like the combination of rising prices and declining assets. Biden’s experts might rediscover that it is difficult to control or stop inflation once it begins. And Milton Friedman will have his revenge.
Exit question: Is Team Biden purposefully grinding down the middle class?