Month: March 2022

By Matt Rosenberg of Wirepoints

The term “mass incarceration” has been weaponized in Illinois, Cook County, Chicago, and nationwide. It is used as a cudgel to try to beat down opposition to meaningful punishment for violent crime. It is meant to support an ongoing – and increasingly successful – push in major metro regions for “decarceration” and rehabilitation. Even for repeat gun law offenders and violent criminals. “Mass incarceration” is also meant to evoke the notion of a criminal justice system imprisoning Americans indiscriminately, in service to a “prison-industrial” complex. 

There’s just one problem. 

In Illinois the incarcerated are less than six-tenths of one percent of the adult population. Nationally in 2019, eight-tenths of one percent of the adult population was incarcerated. That includes all major venues: local, state, and federal jails or prisons. 

There’s more. 

When the “community supervision” population of those on parole or probation is added in, “mass incarceration” grows to still less than 2 percent in Illinois.

Finally, there are attempts to claim blacks are incarcerated “disparately.” But this is based on a flimsy construct that unequal outcomes by race suggest a racist hand on the scales. And notably, 98 percent of adult blacks in Illinois were not incarcerated in 2019.

The Illinois and nationwide general incarceration rate data come from an annual series of reports called “Correctional Populations In The United States,” compiled by the Bureau of Justice Statistics (BJS) of The U.S. Department of Justice. In those reports they are expressed as a rate per 100,000 population. We have converted those rates to percentages.

And the numbers have continued to drop over recent years. Over the seven year-span from 2013 through 2019 for which we analyzed the data, incarceration rates have dropped from seven-tenths of one percent to less than six-tenths of one percent in Illinois, and from nine-tenths of one percent to eight-tenths of one percent nationwide.

Comparable federal data covering the entire incarcerated population for 2020 and 2021 are not finalized and issued yet. But preliminary indicators are – in some part due to health concerns raised by the COVID pandemic – that the numbers will be lower still, both in Illinois and for the nation as a whole. The trend was well underway before COVID. 

Yet at the same time, many major metro regions are beset with sharp increases in certain types of violent and property crimes. In 2021, Chicago Police Department data showed that versus in 2019, shooting incidents were up 67 percent, and murders 61 percent. Carjackings over the full year of 2021 were up 204 percent in Chicago versus 2019. The insane outlier known as expressway shootings jumped in Cook County from 51 in 2019 to 273 in 2021, according to an Illinois State Police dashboard. Reported violent crimes on Chicago’s transit system were up nearly 40 percent in 2021 versus 2015. 

Nonetheless, key Cook County officials have continued to push a social justice transformation of criminal justice. 

Cook County Chief Judge Tim Evans in 2017 instituted no-cash or low-cash bail for charged violent and gun offenders and then fudged data on related recidivism. Cook County State’s Attorney Kim Foxx dropped thousands more prosecutions than her predecessor. Now she’s attacking “over incarceration” and seeking to shorten sentences of imprisoned violent criminals. Supporting her initiative are an Illinois criminal justice reform NGO head and a local law professor who attacked “mass incarceration” four times in one op-ed. 

We’ve already noted that actual reported incarceration rates in 2019 were less than one percent of the adult population in both Illinois and nationwide. So, again, there is no such thing as ”mass incarceration” or “over incarceration.”  

But what if you add in the adult population that’s under “community supervision”? That refers to those on probation or parole. In that case, the numbers grow a little bit. But not to anything approaching “mass” dimensions. 

In Illinois in 2019, the “supervised” adult population rate was 1,220 per 100,000, or 1.2 percent. Combined with the incarcerated adult population rate of 560 per 100,000, that means the total adult “correctional population” – as BJS calls it – was 1,780 per 100,000. 

Rounded up, that’s 1.8 percent. Not altogether nothing. But hardly mass incarceration.

Nationwide in 2019, the adult correctional population was higher, at two-and-a-half percent, or a rate of 2,520 per 100,000 adults.

Looking at incarceration by race in Illinois

Data on incarceration by race is often used to suggest that related decisions may often be made with intent that is either consciously or unconsciously racist. A key part of this argument is what are called “racial disparities.”

We already know that in 2019 the statewide incarceration rate was almost six-tenths of one percent. Using additional BJS and Census data* for 2019 we calculated adult incarceration rates for Illinois by race. Those 2019 adult incarceration rates for Illinois are 2.16 percent blacks, 0.48 percent for Latinos, 0.28 percent for whites, and 0.13 percent for Asians.

So the incarceration rate for blacks was more than seven times that of whites, more than four times that of Latinos, and almost 17 times that of Asians. Yet, the rate for whites is also double that for Asians. No one would say society favors Asians over whites. All of this is to say that concern about “disparate outcomes” are not inherent proof of malevolence. Disparate humans and distinct population cohorts may make disparate decisions and pursue disparate paths. This accounts for much of what are termed “disparities.” 

In Chicago, for instance, although blacks are only 29.2 percent of the population, they were 80 percent of murder victims in 2019, 2018 and 2017, according to annual police reports. And in the 21 years between 1991 through 2011 where murder perpetrators were identified, they were more than 70 percent of perps in each of those years, except one, according to the CPD report “Chicago Murder Analysis” (p. 38). 

Meanwhile, the beat goes on. At the end of Week 13 of 2022, Chicago Police Department summary data show that versus the same period in the last pre-Covid year of 2019, shooting incidents were up 53 percent, murders 68 percent, motor vehicle thefts 56 percent and robberies 13 percent, and major crimes 12 percent. 

Compared to the same span in 2021, the 2022 year-to-date data were not encouraging, either. Although murders and shooting incidents were down six and 11 percent versus a year ago to this point, but overall major crimes are up 36 percent compared to 2021. Motor vehicle thefts are up 43 percent, thefts 70 percent, and burglary 36 percent.

It’s clear what’s the current purpose in Cook County of the rhetoric of “over incarceration” and “mass incarceration.” It is to weaken – in pursuit of a race-driven agenda of decarceration – a criminal justice system which has little to no deterrent effect against a continuing wave of crime which sprung loose in 2020 and hasn’t stopped yet.

Even allowing for alternative sentencing and second chances where appropriate, it seems entirely plausible the real problem is “under incarceration.” 

On Sunday, Will Smith made the Oscars incredibly uncomfortable after he smacked the living daylights out of Chris Rock on stage for making a joke about the lack of hair his wife has.

“Jada, I love you,” Rock said before joking, “G.I. Jane 2, can’t wait to see it!”

Rock might be getting the last laugh as ticket prices for his upcoming shows have gone parabolic, according to ticketing site, TickPick. 

On Monday, TickPick tweeted, “We sold more tickets to see Chris Rock overnight than we did in the past month combined.”

We sold more tickets to see Chris Rock overnight than we did in the past month combined.

— TickPick (@TickPick) March 28, 2022

TickPick’s public relations representative Kyle Zorn tweeted that Rock’s upcoming performance at Boston’s Wilbur Theater on Wednesday saw ticket prices for the cheapest seats jump from $46 to $411, nearly a 10x increase since the slapping incident.

Chris Rock performs at Wilbur Theatre on Wednesday…

$46: Cheapest ticket sold on March 18th

$411: Cheapest ticket currently available

(Data via @TickPick)

— Kyle Zorn (@Kyle_Zorn) March 28, 2022

Commenting on Zorn’s tweet, many folks said: “drama sells.” 

“This was a ploy by Big Comedy to drive up ticket prices. Wake up Sheeple,” one person said. 

Another person said, “Black men helping other black men make money.” 

All press is good press, and Rock is standing to make a killing from the greatest slap television has ever seen (so far). 

Authored by Adam Andrzejewski via RealClear Policy,

Amid the national debate over whether members of Congress should be able to trade stock, the governor of Illinois is demonstrating how prevalent conflicts of interest are for elected officials who own securities.

In 2020, Gov. JB Pritzker’s trust bought stock in the health insurance company Centene Corp. That same year, Illinois gave $2.6 billion worth of Medicaid contracts to Centene Corp.

An investigation by the Better Government Association, a nonprofit Illinois watchdog, uncovered these interesting investments. Even though Pritzker’s investments are in a blind trust, which means that Pritzker is not privy to investment decisions, they demonstrate why blind trusts can’t prevent conflicts of interest.

Each year, Pritzker receives a copy of his current investments from his fund managers, which have the potential to influence the state contracting process.

Pritzker, a member of the family that owns the Hyatt Hotel dynasty, has a net worth of $3.6 billion, according to Forbes.

During his 2018 campaign, he pledged to purge his investment portfolio of companies that held state contracts, according to the report.

However, in 2020, his portfolio managers invested in Centene Corp., one of Illinois’ largest Medicaid contractors, according to the association’s report. While not illegal, the association’s experts say Pritzker could have instructed his trust managers not to invest in state contractors to eliminate the potential for a conflict of interest.

Pritzker and his trust managers refuse to disclose how much the investments are worth nor when the investments were made. All that has been disclosed so far is that his stake in Centene Corp is worth over $5,000, according to his Statement of Economic Interest form filed with the state.

These investments should serve as a wake-up call for investment reform for public officials. Public servants should be transparent when it comes to investing.

The #WasteOfTheDay is brought to you by the forensic auditors at OpenTheBooks.com.

As the SEC under Gary Gensler looks to crack down on activist investors (using the bizarre argument that high-profile activists operate with an unfair advantage to the rest of the market because they have advance knowledge of their own campaigns), one of America’s most visible activist investors, Bill Ackman, announced Tuesday that his firm Pershing Square had officially “retired” from activist short-selling.

Ackman wrote in the firm’s annual report, released Tuesday, that in recent years, Pershing Square has bolstered its returns by focusing on “quieter” investment strategies, like its winning bet on Chipotle Mexican Grill, instead of the “noisy” bets against companies like Pershing Square’s infamous losing bet against Herbalife, which involved a significant amount of conflict and publicity (including the now-infamous confrontation between Ackman and Herbalife bull Carl Icahn).

In reality, years have passed since Pershing Square has gone on the activist offensive against a given target. Ackman said in the letter that Pershing has pursued this approach only a couple of times – with disastrous results in each instance.

More recently, Pershing Square has focused on “quiet” and “constructive” long bets on companies like CMG, RBI and Starbucks – bets that bolstered the firm’s reputation as a “constructive, long-term, and helpful owner.”

Ackman said this approach is an integral part of “Pershing Square 3.0”.

When we consider our history of corporate engagement, we have previously described two Pershing Square eras: (1) the initial period from our inception as Pershing Square 1.0 or “transactional activism,” where we invested in undervalued companies in which we were able to create substantial shareholder value by catalyzing corporate events like spinoffs, strategic asset or corporate transactions, and/or changes in tax or corporate structure, and (2) Pershing Square 2.0, beginning with our investment in General Growth Properties, where we joined the board of directors and helped to create shareholder value from the perspective and influence of an insider.

In the last year or so, some of our investors have asked whether our approach has changed again as they perceive us to be a “quieter” investor. They note that it has been about five years since our last proxy contest, and we have had only positive, constructive engagements with our portfolio companies in as many years.

Following a punishing three-year stretch of losses between 2015 and 2017 driven by the firm’s disastrous bet on Valeant Pharmaceuticals and its failed short against Herbalie, Pershing Square has turned things around, becoming one of the industry’s best-performing hedge funds (particularly in the wake of the COVID pandemic, which saw Ackman and his firm reap billions of dollars in profits off some well-timed bets against the credit market that earned the firm a cool $70 billion payday).

In 2019, Pershing Square saw a nearly 60% return, roughly doubling that of the S&P 500. In 2020, Pershing Square generated a 70% return thanks to its bets against the market, which generated proceeds that Ackman used to buy the dip. And last year, the firm continued with its spate of stellar gains, booking returns of 26.9%.

Pershing has continued to hedge its long bets on equities, allowing it to outperform the S&P 500; so far, it’s down just 2.2% on the year, handily outperforming the S&P 500. 

The firm broke down its bets in the table below (which doesn’t factor in the performance fees).

As far as new positions go, Pershing bought the dip in Netflix, a company that Ackman says the firm has “long admired”. While sell-side analysts question Netflix’s scope for growth, Ackman posited that current subscribers amount to less than 25% of today’s estimated total addressable market of 800 million to 900 million households that have either fixed broadband access or subscribe to Pay TV.

The note also included a ‘greatest hits’ review of Pershing’s biggest bets since inception.

Ackman’s belated “retirement” announcement elicited some snarky comments on Twitter, as users remembered Ackman’s ‘hell is coming’ proclamation that presaged the market ructions in March 2020.

Much easier to go on TV and yell PANIC! then buy the dip. https://t.co/GEV2GkmTXO

— ForexLive (@ForexLive) March 29, 2022

Readers can find the full annual report below:

Pershing Square Annual Report by Joseph Adinolfi on Scribd

Authored by Matt Taibbi and Matt Orfalea via TK News Substack,

As additions to last week’s piece, “The Media Campaign to Protect Joe Biden Passes the Point of Absurdity,” TK’s Matt Orfalea spliced together two more montages.

A California congressman discovers a new favorite word, while the CIA’s former Chief of Staff auditions to become MSNBC’s next super-anchor

The first, “Adam Schiff Says ‘Kremlin’ a Lot,” is self-explanatory, but no less damning.

The California congressman came out of the womb spouting Cold War bromides, and since the beginning of the Trump presidency surpassed even all Russians as the most Russia-focused person on earth. Usually, public figures are taught in Basic Media Training to push out three planned messages per TV appearance irrespective of questions asked. The House Intelligence Chair during the laptop fiasco whittled his message down to an impressive single word: “Kremlin!”

[ZH: As this post was published, we came across this tweet that is worth the price of admission…]

btw the most 👀 passage from Hurd’s book is his evisceration of Adam Schiff

notable for a number of reasons — chief among them, Hurd’s reputation for collegiality and rarely calling out Hill colleagues by namehttps://t.co/5L0V8Dg1P7 pic.twitter.com/Z6Q39ULraS

— Tim Alberta (@TimAlberta) March 29, 2022

*  *  *

The second video, “Russia Russia Russia,” shows former CIA Chief of Staff Jeremy Bash hammering the message about the laptop looking like a “classic Russian playbook disinformation campaign.”

Bash, a signatory to the original “group letter” denouncing the laptop story as having the “classic earmarks of a Russian information operation,” joins the likes of John Brennan, James Clapper, Chuck Rosenberg, Michael Hayden, Frank Figliuzzi, Fran Townsend, Stephen Hall, Samantha Vinograd, Andrew McCabe, Josh Campbell, Asha Rangappa, Phil Mudd, James Gagliano, Jeremy Bash, Susan Hennessey, Ned Price, Rick Francona, Michael Morell, John McLaughlin, John Sipher, Thomas Bossert, Clint Watts, James Baker, Mike Baker, Daniel Hoffman, Susan Rice, Ben Rhodes, David Preiss, and Evelyn Farkas as former intelligence or counterintelligence officials who’ve gotten paid on-air contributor jobs, in case you were worried the CIA and FBI were not able to get their message across to the public. Here’s Matt’s (as usual) on-target rip on MSNBC:

*  *  *

Subscribe to TK News by Matt Taibbi

Oil ended lower on the day at settlement, but staged a big comeback intraday from the plunge triggered by reports of Putin’s peace talks optimism (according to the top Russian negotiator, the talks were “constructive” but they still ended with no agreement whatsoever). U.S. Secretary of State Antony Blinkin expressed skepticism about Russia’s promise to de-escalate its military activities around Kyiv.

“There is what Russia says and there is what Russia does,” he told reporters.

Fears over Shanghai’s lockdown and the knock-on effects on demand (could lower oil demand by as much as 200,000 barrels a day for the duration of the restrictions) also weighed on oil prices as WTI tumbled back below $100 briefly intraday before ripping back up to $105 by the close.

“We are still in a $100 environment, no question,” said Paul Sankey of Sankey Research on Bloomberg Television. China’s continuing lockdowns are also relieving some pressure, but markets remain volatile, he said. “China is taking heat out of the market, but if the heat comes back, that adds $10” a barrel.

For now, all eyes on Cushing stocks (rebuilding) and if any demand concerns show up in the inventory data…

API

• Crude -3.00mm (-1.588mm exp)

• Cushing -1.061mm

• Gasoline -1.357mm

• Distillates -215k

Cushing stood out as it flipped back to a draw after two weekly builds in a row, but Crude (bigger than expected) and products all saw inventory draws too…

Source: Bloomberg

WTI hovered around $105 ahead of the API data and lifted modestly after.,.,.

“Fundamental traders and investors have taken their chips off the table in crude due to extremely high volatility, leaving the primary players in the market to be traders looking to hedge geopolitical risks,” said Rebecca Babin,senior energy trader at CIBC Private Wealth Management. 

Remember when Zoltan Pozsar said one month ago that Powell has to crash the market in order to spark the recession he so desperately needs to finally contain inflation? Well, he may not have long to wait according to the latest note from Bank of America’s derivatives team.

Bear markets produce the most vicious rallies – recall the relentless facerippers of Oct/Nov 2008 or March 2020 – and indeed, over the last two weeks, the S&P has produced one of its sharpest rallies in history. As shown below, the recent 10-day ramp ranks in the 98th %ile of bear market rallies and in the 99.5th %ile of non-bear market rallies

The recent rally has also surpassed the largest 10-day returns in 7 of the S&P’s 11 bear markets since 1927 and was actually larger than any of those bear market rallies when controlling for the size of the prevailing max drawdown.

This historic bear market rally is “Not explained by fundamentals” according to BofA, and is taking place despite what the bank’s derivatives strategists note is clearly weaker macro fundamentals (more hikes, higher inflation, and curve inversion) and the Fed leaning against equity market strength to hike faster (i.e., the birth of the short “Fed call”, the opposite of the bullish Fed put).

Some numbers: the rally has sent the S&P 6.7% above where it stood before Russia first moved into Ukraine on 24-Feb, bringing the bank’s measure of cross- asset stress down in tandem.

During the same time:

• The Fed funds rate priced in for Dec-2022 is up from 1.57% (6 hikes) to 2.10% (8 hikes)
• US 10yr inflation breakevens have risen from 2.58% to 2.96%
• The 2s/10s Treasury curve just inverted (and certainly by far more than it ever did pre-GFC)
• Investors thinking we are “late in the cycle” up from 48% to 60% in our March. Fund Manager Survey, and “global recession” jumped to 2nd biggest tail risk.

Instead, markets have been dragged higher on the back of yet another epic short squeeze, and an even more furious gamma squeeze as Nomura’s Charlie McElligott explained earlier.

As one of Goldman’s top traders noted over the weekend in a surprisingly bearish note, the light positioning and inflated earnings are not enough to sustain gains: Indeed, as BofA notes, some blame the rally on light equity positioning and a positive effect of inflation through higher earnings. On the latter, the experience of the 1970s suggests otherwise (S&P returned 1.6% ann. during the decade). At the same time, Bank of America’s strategists note that the lack of equity positioning (evident in the bank’s Bull & Bear signal enter a “Buy” territory and lack of vol convexity in the selloff), even if it helped this bounce, seems unlikely to sustain it against this challenging macro backdrop.

While stocks are whistling past the graveyard, rates markets a lot more stressed, and are pricing in a lot more risk than equities. As shown in the chart below, the spread between the S&P gain and Treasury selloff over the last 10 days is the 5th biggest since the GFC.

Even more stunning, the increase in rates vol (MOVE Index) relative to falling equity vol (VIX) has been the largest since 2009 and one of the largest ever.

What tends to follow? In the 2009 episode, the S&P fell 7% in the next 6 weeks in what was its first sizeable dip since the GFC low.

But wait there’s more, because now that the “Fed put” has transitioned into a “Fed call”, any market upside is at best questionable: According to BofA, “investors should have by now stopped counting on the “Fed put” to come to the rescue. In fact, we think the Fed put has been for now replaced with a (short) “Fed call”.

What do we mean by this? The Fed is seeking tighter financial conditions to aid their fight against inflation, and in practice this means lower risk assets. Hence, they may hike faster on equity rallies, limiting the upside in stocks. Case in point: various financial  conditions measures (and our GFSI index) have actually loosened since the Mar FOMC and triggered an avalanche of “50bp” comments from Fed speakers (see Global Rates Weekly)

As a counter to its bearish view, BofA notes that softer inflation is the only true, but unlikely upside risk: The arrival of the short “Fed call” suggests the key catalysts for sustained upside in US equities is one that, without harming growth, lowers the Fed’s need to quickly raise rates back to neutral. The most visible upside risk, therefore, is inflation softening on its own from here. And yet most economists see risks of inflation worsening on its own. Other upside catalysts that may only work in the short term are:

• Retail buying returns or earnings shine: but with the inflation backdrop unchanged, this allows the Fed to tighten further (and options data suggests extreme retail buying has not returned)
• Russia-Ukraine ceasefire: most positive near-term, falling commodities may be positive for equities (Exhibit 16), but lower geopolitical risk allows the Fed to hike faster (recall they pushed back against 50bps in March due to the conflict)

• Fixed income markets break before equities notice: the Fed is most sensitive to credit spreads and in theory could be forced to rescue credit before equities wake up to reality; however, this has never happened before, and it would only kick the can down the road if inflation doesn’t abate

How to trade this? In summary, for a moderate grind higher towards all-time highs, the bank likes buying S&P call ratios (buy 1, sell 2) in May, selling elevated implied vol and offering up to a 4.7-to-1 payout. To hedge downside risks, consider buying S&P June put spread collars, which cheapen the cost of the hedge by also selling away upside (this time above all-time highs) and offer close to a 10-to-1 max payout.

• To rent upside: with positioning still arguably light, the pain trade remains a grind higher. To participate in a continued grind higher for a low upfront cost and with limited downside risk, BofA likes buying call ratio overlays in SPX, benefitting from elevated implied vol. For instance, one can buy SPX May 4650/4800 1×2 call ratios (buy one & sell two calls) for 0.70% (4.7x max payout, ref. 4575.52). The short calls are struck at all-time highs.
• To hedge: the earlier points reinforce our preference for put spread collars as cheap protection, particularly when initiated on a rally as sharp as the S&P has just delivered. For instance, consider buying SPX Jun 4900/4400/3900 put spread collars for 1.1% (9.9x max payout, ref. 4575.52). The short call is struck 2% above all-time highs.
• Risks: beyond the upfront premium, the risk to both trades is a rally beyond the short call strike.

Much more in the full BofA note available to pro subs in the usual place.

More FedSpeak to normalize an extremely hawkish expectation for the next 9 months today. Former NY Fed boss Bill Dudley said, in a Bloomberg op-ed, that The Fed’s actions will lead to an “inevitable recession.” Philly Fed’s Pat Harker is “open” to 50bps hikes at each meeting and favors starting QT “sooner not later.” And then St.Louis Fed’s Jim Bullard reiterated, in an essay on the Fed’s website, that he favors raising rates above 3% by year-end. Thay all reiterated the need to ‘keep inflation expectations anchored’… well, given the explosion in de-anchoring this morning from The Conference Board, The Fed is completely missing the mark.

And as Deutsche’s Jim Reid remarked, The Fed have never been as behind the curve as they are today.

For a sense of just how far behind, The Taylor Rule suggests given the current inflation rate and unemployment rate, The Fed needs to hike by an absurd-sounding 1155bps to get back to ‘normal’…

Source: Bloomberg

And amid all this, the most-watched part of the yield-curve – 2s10s – inverted briefly (and the rebounded)…

Source: Bloomberg

And the market is now pricing in 9 25bp rate-hikes this year… and more importantly 3 25bp rate-cuts in 2023/24…

Source: Bloomberg

And those positive sounding headlines on Russia-Ukraine talks lifted stocks, bonds, and the Ruble, while gold, oil, and other commodities (e.g. wheat and palladium) were monkeyhammered lower.

Stocks continued their surge higher with Small Caps leading (up almost 3%)…

‘Most Shorted’ stocks were squeezed yet again and that actually lifted the ‘most shorted’ index into the green for the YEAR…

Source: Bloomberg

A chaotic day in the meme-stocks today which lost some of their momentum into month-end…

And ARKK soared…

Bonds and stocks have dramatically diverged over the last 10 days…

Source: Bloomberg

The spread between the S&P rally and Treasury selloff over the last 10 days is the 5th biggest since the GFC. Even more absurd, the increase in rates vol (MOVE Index) relative to falling equity vol (VIX) has been the largest since 2009 and one of the largest ever.

The Dollar tumbled today to two-week lows (having tagged the stops at pre-FOMC yesterday)…

Source: Bloomberg

The Ruble soared higher once again today, managing to fully erase all losses since the invasion crashed the Russian currency…

Source: Bloomberg

Bitcoin held on to its gains yesterday, hovering just below $48,000…

Source: Bloomberg

When the Russia-Ukraine headlines hit, gold was immediately puked lower, breaking below $1900. But once again, buyers stepped back in at that level…

Crude prices were also clobbered on the optimistic peace talks reports, sending WTI back below $100 briefly before rational dip-buyers stepped back in…

Finally, over the last two weeks, the S&P has produced one of its sharpest rallies in history, larger than the biggest 10-day rallies in 7 of the S&P’s 11 bear markets since 1927.

And it’s all been because the ‘gamma-squeezers’ are back.

As Nomura’s Charlie McElligott noted earlier, Emboldened by passive Systematic bid to spot markets and feedback loop into Vol compression: The WSB-crowd is back in a major way on this Equities bounce, where for the past 2 weeks, we see the collective “upside grabbing” activity at levels only previously witnessed during prior speculative frenzy periods in the COVID / WSB / “stimmy” era (our basket of 10 of the most prominent “meme stocks” has seen their aggregated daily Call option volumes jump to over +2 z-scores as of last Friday vs the 2 year lookback).

By Joe Carson, former chief economist at Alliance Bernstein

Policymakers are trying to achieve a benign economic outcome, a soft landing similar to 1995. But unfortunately, history shows that soft landings are rare. Since 1960, there have been three soft landings but nine recessions. Soft landings happen when the Fed acts early and often, and recessions occur when the Fed acts late. Unfortunately, the Fed is late, very late today.

One of the biggest challenges for the Federal Reserve is that it confronts the most significant inflation cycle in decades without any trusted policy gauges. Decades ago, policymakers abandoned the monetary targets, arguing that they no longer provided a consistent and reliable nominal spending and inflation signal. And a few years ago, Fed Chair Powell “retired” the Phillips Curve from a policy gauge, arguing that there was no consistent pattern between labor market slack and up and down movements in inflation for the past two decades.

The Fed’s playbook from the 1994 episode should have helped, but policymakers did not follow it. The 1994 transcripts of the Federal Open Market Committee (FOMC) meetings reveal that Fed Chair Alan Greenspan argued, “we are facing a test over whether inflation is a Phillips Curve phenomenon or a monetary phenomenon.” He said if it’s a Phillips Curve phenomenon, we are on the edge of significant inflation as there was no slack in the industrial markets. However, if inflation is a monetary phenomenon, then the inflation pressures should be a “blip” as “subnormal growth in money and credit” has to mean something.

Even though Greenspan debated with his colleagues, he concluded that “we have to presume the pressures are there.” As a result, he felt that the FOMC needed to take more preemptive actions of raising official rates since it was too risky to be wrong. Whether by design or luck, the economy achieved a soft-landing in 1995, and the much-dreaded consumer inflation cycle never took off.

Policymakers need not have the same debate nowadays as Phillips Curve, and monetary inflation features are present. To be sure, broad money growth has topped 40% in the past two years, the fastest ever. And, wage increases have become significant and persistent (average wages up 6.7% in the past year). And wage pressure will continue to be an issue with a relatively low jobless rate of 3.8%.

The inflation cycle of today is also more advanced, markedly different in scale and scope compared with 1994. For example, in 1994, producer prices for crude goods, excluding food and energy, rose 15%, but in 2021, the same prices rose 29%. Greenspan’s primary concern in 1994 was the spike in crude prices would work its way up to the pipeline, lifting prices everywhere and in everything. In 1994, that didn’t happen. But in 2022, it has.

Producer prices for intermediate materials, excluding food and energy, rose 23% last year. That was nearly 5X times the increase of 1994. Consumer prices have increased 7.9% in the past year, and the peak is not yet. Yet, in 1994, consumer prices showed no acceleration, ending the year at 2.7%, the same rate at the outset.

Policymakers’ 2022 playbook is a “wing and prayer” strategy, hoping for a good outcome but unwilling to apply sufficient monetary restraint to get a good result. Current projections show a peak fed funds rate of 2.8% at the end of 2023, or less than half today’s inflation rate. Soft landings of 1994 and 1984 came about with policy rates 300 to 600 basis points above inflation.

If lifting nominal interest rates well above inflation helped engineer a soft landing in the past, what are the odds of achieving a soft landing by doing the opposite? Close to zero, in my view. Also, policymakers expect the jobless rate to be even lower at the end of 2023 (3.5%) than today. So how does the Fed expect to break the wage-price cycle (Phillips Curve) without creating slack in the labor markets?

Fed Chair Jerome Powell has often said monetary policy is not on a preset course. Yet, it’s on a preset path to fail this time as long as it let’s inflation linger and keeps policy rates too low. Investors forewarned.