This is a succinct and colorful explanation of the risks created by the Fed’s run-the-economy-hot policy. With a massive federal deficit and real interest rates already in the negative, the stakes are very high.

  • Asset prices have soared because “no matter how drunk the economy and investors get, the Fed simply won’t take the punchbowl away.”
  • Fed officials think they can achieve the impossible: low unemployment, strong asset prices and boundless faith in the world’s reserve currency, all at the same time.
  • Their recent rhetorical shift to a more hawkish tone is likely intended to support the dollar.
  • If inflation expectations increase too much, people will begin stockpiling, raising prices further and worsening the problem.
  • Allowing inflation to rise now raises the odds the Fed will have to hit the brakes hard in the future.

Leaving rates at the zero bound is financial repression. It harms savers and retirees. Buying $40 billion worth of mortgage bonds every month to hold down mortgage rates in the midst of an extraordinarily significant rise in housing costs seems counterproductive, especially for first-time buyers.

Even more egregious is the Fed seems to have assumed a third mandate: keeping the stock market rising. Not only does this exacerbate wealth disparity, it borders on malpractice because, at some point, the Fed will have to take its foot off the accelerator. When that happens the potential for another “taper tantrum” is significant. The Fed absolutely should not think the stock market is its responsibility. To do so (as I believe they are) sets up all of us for extreme future volatility.

Supply chain problems are going to get fixed, albeit slower than we would like. Eventually, the fiscal stimulus will go away and everyone will have to adjust. Monetary policy isn’t the solution for that particular problem.

Constant Fed stimulus has to stop. Look at the gargantuan size of the Fed balance sheet:



The economy is growing now. Unemployment, while still elevated, is improving. Creditworthy borrowers can easily get financing. Even if another major COVID-19 wave strikes, we have thankfully progressed beyond the need for economy-stifling restrictions.

Fed policy isn’t the only unprecedented event. The resulting asset bubbles (stocks, housing, commodities, crypto) are also unprecedented.  Odds are high they will end badly.


Market Data


  • Within a few days of major stock indexes sitting at record highs, there has been quite a bit of internal deterioration. The Nasdaq has sounded a Titanic Warning, and the Advance/Decline Lines are hitting multi-month lows, highlighting breadth divergences.
  • Institutional investors had been raising cash, hoping for a pullback that they could buy on… In the meantime, retail investors were continuing to pile into stocks at a rate not seen in six years…
  • The number of individual stocks hitting new highs each day has been decreasing as of late… Plus, an increasing number of stocks are starting to trade below their long-term averages (though that is only down slightly from a record high).
  • When this combination happens, it’s usually an early indicator that a broader sell-off in stocks could be ahead… or at the very least, that we’re closer to a top than a bottom. The black line shows the value of the NYSE Composite. And the blue line shows the percentage of NYSE stocks above their 200-DMAs at any point over the past two years.



  • The recent drop in the stock/bond ratio suggests peak US GDP growth.



  • The stock market saw a healthy pullback from the highs. The S&P 500 held support at the 50-day moving average. Dip buyers are circling, with futures higher.



  • The reopening trade took a hit, with airlines down 10%, leisure and entertainment down 8%, and Small Caps continuing to struggle, down 10% in 10 days.
  • US stocks have sharply outperformed the rest of the world year-to-date.



  • The Nasdaq 100 appears overbought at resistance.



  • Last week, we saw early selling pressure that started to trigger some risk warning models for the first time. Tuesday’s buying pressure, with follow-through on Wednesday, erased some of bears’ fuel, however. There remain some divergences, and fear is building among investors.
  • The percentage of bullish investors declined sharply this week.



US Economy


  • Consumers increasingly see housing as too expensive, and fewer households are comfortable with the current mortgage rates.
  • Residential construction remains robust, with housing starts hitting multi-year highs.
  • Building permits were a bit less vigorous than the market expected but still quite strong.
  • There is still quite a bit of multi-family construction in the pipeline (apartments).
  • The backlog of authorized but not started single-family units keeps climbing. Builders are struggling to keep up.



  • The 30yr mortgage rate dipped below 3% as Treasury yields tumbled.



  • Nonetheless, demand remains robust.



  • Homebuilders have been somewhat less upbeat as traffic of prospective buyers pulls back from the highs.
  • New listings are up as sellers take advantage of the price surge.
  • Some sellers have been dropping prices.
  • Single-family housing rents are surging, especially for high-end properties.
  • The 10yr Treasury yield dipped below 1.2%, crossing the 200-day moving average. We should see lower mortgage rates in the days ahead.
  • Businesses continue to report unusually low inventories.
  • COVID cases are climbing, but the death rate remains low.



  • This chart shows historical and projected GDP rankings.



  • The HPS-CS consumer sentiment index continues to deteriorate in response to higher prices. So far, however, that hasn’t translated into weaker consumption.
  • Hotel revenues are back near pre-pandemic levels.
  • Airlines sales are recovering
  • The supply of entry-level housing is at multi-decade lows.
  • The median price of sold existing homes hit $363k, a new high.
  • More companies are reporting increased export orders.
  • Employment metrics are remarkably strong.
  • Supplier bottlenecks remain acute.
  • Initial jobless claims remain stubbornly high relative to pre-pandemic levels.
  • Continuing claims are moving lower. We should see sharp declines ahead as states’ cancellations of emergency benefits are incorporated in the data.
  • Business travel is recovering.


Thought of the Week


If you look at what you have in life, you’ll always have more. If you look at what you don’t have in life, you’ll never have enough.

-Oprah Winfrey


2 Pictures of the Week





All content is the opinion of Brian J. Decker