Market Mania Breaks Down and War Breaks out Wider

Suddenly the rate-cut mania is starting to crash and burn. Stocks dropped as positive retail data caused investors to say, “Oh, maybe that Fed pivot isn’t coming in March after all!” It was only recently that I went on a tirade about how incredibly out of touch the rate-cut fantasies for 2024 are with reality and out of touch with how the Fed works during times of inflation and out of touch with the actual rising rate of inflation that is already back in play as I predicted.

I did my best to lacerate this self-perpetuating fantasy, I said, because it is important to understand how deep this denial is and how it propagates. With nearly all investors on the rate-cut side of the boat, it greatly increases the likelihood the boat will swamp if investors all realize together how wrong they are and run for the other side of the boat.

I called it one of the worst financial fantasies in history because the mania pushed up stocks in one of their steepest rocket rides ever when they really have no reason to rise at all and pushed down bond yields (prices up), effectively killing the very financial tightening that had caused Powell to whisper hope of looser policy back in November IF inflation kept falling and IF markets kept tightening on their own; but markets stopped tightening and ran slack the second Powell spoke, and inflation is back to rising everywhere, effectively evaporating the basis for investors’ fantasy without their realizing it.

What a difference a day makes. The news is full of articles about the overnight breakdown of this fantasy, about the return of inflation around the world, all chiseling down those rate cuts bets and washing away of some of the pivot mania as bond yields started pricing higher in the face of retails sales that decreased the likelihood of any softness from the Fed. The bond vigilantes got shaken awake in their saddles as I wrote about lately.

Now, I’m not saying the fantasy has perished altogether. The stupor has been so widespread and so deep that there is plenty of likelihood that stock and bond investors could all fall back into their opiated dream in another day or two; but recently gave them all a good shake with a taste of the reality I was talking about. Let me give just a quick rundown of all the explosive news:

Stocks fell for a third day, and the mainstream financial media attributed that to a “Fed-pivot repricing.” The Dow notched its third straight losing session, falling further away from the high ceiling I wrote about, and the 10YR Treasury bond climbed readily back above 4.1% and easily held, making January look like a month that is reversing the trend that Powell’s whisper of hope (should everything go perfectly with inflation, which it is no longer doing) set in place for November and December.

Even Wolf Richter writes that the “drunken sailors,” as he calls spendy consumers, decided to “push back against rate-cut mania.” And MANIA it has been! Mass mania or as I called it, “mass delusion.”

However, delusions eventually break upon the rocks of reality, and we got to see some of that.

Even the release of the Fed’s “Beige Book” gave no hope for economic growth, but raised concerns from producers that costs are rising and will have to be passed along. The only hope producers expressed amid their pessimism about the economy was that MARKET interest rates on business credit and mortgages had fallen over the past two months as bond yields cratered, but that is reversing, no sooner than business leaders had expressed that hope to the Fed.

The title of the article about the Beige Book slightly miscasts the situation, as could be expected. Optimism did not rise “on hopes of lower rates,” as the title claims. Nothing was said about businesses being hopeful rates would be cut further or fall further on their own. Optimism rose BECAUSE the lower market rates in November and December gave some hope that business conditions were easing on their own. They were! Because of how the bond vigilantes misread the Fed. Now they are not as the bond vigilantes are waking up to realize, “Oh, no rate cuts likely in March! Yikes!”

One of the major reality checks that busted up some of that clogging of the arteries that feed the dollar-green brains of investors is the rise in inflation, being driven higher, faster for the reason I have been pointing out all of this month: War in the Middle East, which has riled up the Houthis, is already creating more inflation at a time when inflation has already been rising (contrary to most financial reporting) in recent months, driving down hopes that the Fed will have latitude to even consider rate cuts anytime soon.

Container lines, the news say, have scrambled to rent a lot more container ships in order to ship the SAME amount of goods vastly greater distances, meaning they arrive at half speed, so it take twice as many ships over a given period to get the same amount of ships each day regularly into ports. That has already doubled the cost of each container ship on top of doubling the number of ships needed.

This is exactly the situation I warned we would see developing out of the Red Sea crisis:

Red Sea diversions mean container lines need more ships to carry the same amount of cargo. The security situation — which is even more precarious in the near term due to coalition air strikes in Yemen — has already driven spot container freight rates much higher. Now it is starting to push up the price container lines pay to rent ships.

“This week saw a scramble for prompt tonnage,” said MB Shipbrokers (formerly Maersk Broker) in a market report on Friday, referring to ships that can be chartered immediately.

“Owners have certainly become more bullish and are pushing for higher-than-last-done levels in all segments and most regions.” Charter rates are headed higher, “specifically for short periods of three to six months’ duration,” said MB Shipbrokers….

The Red Sea effect is now “starting to show.”  

As I’ve said, those higher costs will pass through to consumers as soon as the goods being shipped hit market shelves because these huge price increases have to get priced into the cost of goods sold and passed along to the consumer.

The initial diversions away from the Red Sea caused delays in return trips to Asia, prompting liners to charter ships for short terms as “extra loaders” to pick up the slack.

Now that diversions are more ensconced, liners will need to add additional vessels to service strings to maintain weekly schedules, given the longer voyage distance around the Cape of Good Hope.

The second thing I wrote about all of this is that the repricing will affect all shipping everywhere in the world because ships are portable. They go where they are needed. So, the ability to get higher rates to add ships around the Cape of Good Hope means other routes nowhere near that route have to compete for ships at those higher rates in order to hold on to the shipping they have.

This isn’t likely to be permanent, of course, and may not even be longterm because many allies are pounding the Houthis, and the US and UK have even taken the war onto Yemeni soil. The Houthis are not large in number, and their supplies are getting blown up. Still, other groups could join the fray, so it may take awhile, and the inflationary damage is mounting quickly all around the world because of it.

The article also notes the shipping problems in the Panama Canal that add to this crisis that I have been writing about.

The overall situation is already starting to look, as I warned it would, like the Covid supply-line crisis. (Not as great so far, and I said it likely would not get that great, but shaping up in that direction because entire fleets have already been locked up in new charters through the end of 2024 at these higher prices.)

So, all of that is piling on inflation, and in the news we see that two other nations have in the past month seen inflation return to rising, just as we’ve seen in the US—the UK and Canada. Both articles say in their headlines there go “the rate-cut bets.” So, the dream of central banks rapidly cutting rates is rapidly burning out through the tops of investors’ heads.

More War for ‘24

That was the title for my 2024 prediction in my last Deeper Dive. In summary, I laid out in that particular article how much worse war is likely to become in 2024 than it was in 2023 and gave many reasons why. In fact, I said 2024 would likely become worse than anytime since WWII, and the news is also loaded with affirmations of that trend, which I said in that Deeper Dive was just ONE of the reasons I have titled 2024 “The Year of Chaos.”

In the news we read that Iran has brazenly extended its attacks against those it ironically labels “terrorists” against Iran (ironic only in that it comes from the masterminds of terrorist enterprises) from Syrian soil to Iraqi soil and in the last 24 hours to Pakistan, raising sharp criticism from those nations. So, the Middle East war is, as I said in that Deeper Dive, spreading through smaller parties everywhere.

One Pentagon insider (unnamed source, so questionable, of course, as is the standard of journalism these days all the time) says we are “on the brink of WW3.” Maybe that was just a closet cleaner inside the Pentagon; who knows? With all that is happening and with Iran becoming more brazen, however, it’s not surprising to read that. In my Deeper Dive, I pointed out how apocalyptic some are sounding and offered a few of the reasons the present times seem apocalyptic, not just because of the size of the threats that are developing but because of where and how they are shaping up.

A source inside the US Pentagon has warned the world is on the brink of a major conflict as Iran and its allies continue to launch attacks across the Middle East….

Defence expert Nicholas Drummond echoed concerns that the conflict in the Middle East could potentially escalate but warned that if Tehran directly attacked Israel, the ensuing war would be “the end of Iran….”

"The West is saying to Iran 'behave yourself, or we will attack you directly'.”

"I think it's highly possible that if Iran continues to act through proxies, or to act directly, that threatens Western interests, we could see military action taken against Iran, and that would be a major conflict in the Middle East…. I think Iran has to be very, very careful. It has been playing a dangerous game. And it's about to get punished if it doesn't step back."

I posted an even more ominous story about how war is shaping up for 2024 because of who it was that was saying it, which I didn’t have time to cover, so I’ll cover it now: (It came out a day after I published my Deeper Dive about “More War.”)

Britain facing wars in Russia, China, Iran & North Korea in five years – as world in ‘pre-war’ phase, warns Grant Shapps

The world is now in a ­“pre-war” phase, ahead of a possible World War Three, the [UK] Defence Secretary warned.

In a major speech at Lancaster House in London, he urged Britain and its allies to ramp up defence spending, insisting: “The era of the peace dividend is over.”

He added: “In five years’ time we could be looking at multiple theatres involving Russia, China, Iran and North Korea.”

He said the Ukraine war had put the future of the world order at stake.

The defense secretary was pushing for higher defense spending commitments. The powers that be and the MIC in the US are increasingly moving to a war footing, too.

He added: “The choice is stark. Some people, especially on the Left, have a tendency to talk Britain down.

“They believe Britain can no longer have the power to influence world events.

“I passionately believe these unpatriotic, Britain-belittling doom-mongers are simply wrong.”

What is perhaps more concerning, IF IT IS TRUE, and, in the very least, may be the basis for this raised global alarm is the following;

Since Russia's invasion of Ukraine in February 2022, Vladimir Putin has become a growing threat to world order.

On top of almost two years of brutal warfare a leaked military report yesterday showed the despot's step-by-step plane [sic.] to bring the West to the brink of World War Three….

The secret documents described Putin's possible "path to conflict" which reaches its climax in 2025 on "Day X" when half a million Nato and Russian soldiers face each other.

The bombshell files, obtained by Bild from Germany's Ministry of Defence, lay out exactly how the Kremlin boss might be preparing for a hybrid attack on Nato as early as next winter and a full-blown war next summer.

It could begin with a spring offensive against Ukraine as he mobilises hundreds of thousands of new soldiers in just a few weeks time.

The dictator's danger is found not just in his bloodthirsty attempts to absorb Ukraine into Russia - but in his relationships.

Putin's alliance with North Korean dictator Kim Jong Un has seen the eerily similar pair bond over their shared views about the West.

Just weeks ago Putin unleashed North Korean rockets in Ukraine, killing hundreds in an unprecedented development.

And Kim even told Putin that he was sure that the Russian army would triumph against "evil" at a decadent Bond-villain-style banquet.

After labelling South Korea his "principle enemy", Kim threatened to start a war - and the nuclear weapons at his disposal are not to be ignored….

Last year, former US Secretary of State Mike Pompeo said Vladimir Putin was “not even close” to how dangerous Xi is.

With respect to how quickly things are heating up in the ME,

Iraq, Syria, Yemen and Lebanon have all been dragged into the conflict as have the UK and US. And Iran's terror proxies including Hezbollah and the Houthis have gone up against Israel….

And, of course, we have Hamas warring with Israel in the center of it all as the nucleus of the reactor.

Without trying to weigh in on the merits or demerits of any of the arguments, my message in the Deeper Dive was a laid-out prediction for more war in 2024, by far, than we saw in 2022 or 2023. That, too, is likely to drive up inflation.

So, the market notions that the Fed is going to make a massive six rate cuts stray far outside of reality … unless and until all of this causes massive economic wreckage, forcing the Fed into restoration mode, but then the rate cuts certainly are not going to help out the stock market any.

Even without the cost of all of this extra war, one article points out that total interest on the US national debt has absolutely exploded in just a matter of months, while another headline that I didn’t post because it cannot be read without a membership, says, “Coming flood of US Treasury issuance unsettles some investors after blazing rally.” Those issuances will push the interest on the national debt even higher. We could wind up close to a trillion dollars just in interest payments in 2024.