Today's market was a tug of war between positive short-term price momentum and developing headwinds (higher interest rates and rising energy prices).
On balance breadth was negative and I remain negative in my market outlook.

Thanks for reading my Diary.

Enjoy the evening.

Be safe.

Here is the closing breadth, biggest movers and heat map.

Breadth

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Movers

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Heat Map

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I added to my (SPY) short at $443.49.

* And are investors under pricing risk again?

• In a paperless and cloudy world, are investors and citizens as safe as the markets assume we are?
• In a flat, networked and interconnected world, is it even possible for America to be an "oasis of prosperity" and a driver or engine of global economic growth?
• With the G-8's geopolitical coordination at an all-time low, how slow and inept will the reaction be if the wheels do come off?

The reason I want you to remember these questions is that the answers might serve as valuation busters in the fullness of time...

- Kass Diary, "This Ain't No Seder, I Now Have Eight Questions" (2017)

Nothing would surprise me, anymore.

I added to my (SPY) short at $443.03.

While the investment mosaic has never been more complex, a toxic cocktail of much higher energy prices (Brent crude +$8) and interest rates (the 2 year US note is +17 basis points) pose a rising risk and structural headwind to equities - especially after the Tuesday-Friday rip roaring rally. 

It is again time to consider return of capital over return on capital.  

I believe it is time to secure my seat belt and I have further added to my short exposure.

From Charlie!, here.

I added to my (SPY) short at $443.59.

Masterhedge

Fed speaks market goes down.

badgolfer22 Masterhedge

ummm, weren't they just a year or so ago hoping and praying for some inflation? and then when they got what they wanted....and then some..it was just gonna be temporary? these folks are f**king jokes. clueless clowns that don't know any more than I do...and that's the scary part....

Breaking Market News

@breakingmkts
·4m

*POWELL: WE ARE NOT EXPECTING NEAR-TERM PROGRESS ON INFLATION

* NYSE volume has picked up as prices move lower - NYSE volume +15% above its three month average

* NYSE decliners lead advancers by 1.7:1.

* Nasdaq volume has also picked up - at 22% above its three month average.

* Nasdaq decliners lead advancers by 1.9:1.

* VIX +3% at 24.50.

Break in!

Brent crude +$7/barrel to $115.

Can't be good for equities. 

* Rising interest rates are not market friendly

* As bonds get schmeissed, I have expanded my short exposure

* Cash is the alternative (CITA)

"We are a long way from equilibrium on the Fed's Balance Sheet."

- Fed Chairman Powell 

In my 15 Surprises for 2022 I predicted that Chairman Powell would grow surprisingly hawkish:

Mar 17, 2022 ' 08:05 AM EDT DOUG KASS

The Fed, Hyman Roth, and Me

* I saw this coming... a hawkish Fed, labor shortages, wage inflation, $110 oil and persistent inflation in the face of continued supply chain dislocations

* I do not see a benign outcome

* Stick with quality

* Trade sardines, don't eat sardines

Surprise #2. Powell Turns Hawkish - But Monetary Policy Fails to Dent Rising Inflation

Despite accelerated tapering and an attempt to signal slow and steady rate hikes, inflation accelerates well beyond expectations. By February inflation is running close to 8%. Though comparisons are tough, inflation stays well above consensus expectations (sticking at above 5% this summer).

ESG investing, the complete reopening of the global economy and rising geopolitical tensions sends oil to over $110 a barrel.

While Omicron proves far less virulent than initially feared, business closures put in place and uncertainties serve to exacerbate the supply chain dislocations seen in 2021. The continued logistical mess reinforces more (cost push) inflation and mounting inflationary expectations.

The U.S. labor shortage intensifies and wages grow +6%. The shift from "goods to services" demand post Covid actually causes more inflation as, surprisingly, service prices accelerate across the board.

"Slugflation" (sluggish growth and sustained inflation), a distant cousin to "stagflation," becomes a feature and commonly used term in 2022.

As interest rates increase (in the U.S. and in Europe), the rising higher debt burdens in the financial system - which have clearly institutionalized instability - lead to a new regime of equity market volatility rarely seen in modern investment history. Daily moves in the S&P Index of 2%-3% become commonplace.

The housing shortage worsens, as labor shortages limit home construction and homes for rent companies buy whatever supply they find. Home prices go up by another 15%. Eventually, the high prices for everything will begin to impact affordability and demand, as consumers can't afford to maintain consumption when interest rates ratchet higher later in the year.

The Fed is left in an impossible position of finally realizing it needs to get "serious" about inflation into a slowing economy.

Powell realizes he should have let Lael Brainard have the job.

Treasury Secretary Yellen, recognizing that inflation is materially widening the wealth and income gap (by acting as a regressive tax) encourages Powell to do "whatever it takes" to stop inflation.

Whip Inflation Now (WIN) buttons are distributed nationally.

Powell ends up more Volcker-like than anyone predicted. The Fed Chair turns very hawkish and focuses on inflation - not jobs or stocks. But it is too late and the monetary pivot fails to materially reduce an elevated level inflation as years of monetary excesses are not easily reversed.

In 2022 we learn that there is no monetary policy that remedies the inflationary impact of continued global supply chain and logistical disruptions and imbalances.

- Kass Diary, 15 Surprises for 2022

I saw this coming as clear as day (See Surprise #2, above, in my 15 Surprises for 2022)

If the Fed follows through along with its stated plan of multiple rate hikes, coupled with the continued pressure on the consumer from inflationary pressures, it creates tightening financial conditions that are a recipe for economic and possible market disaster.

The markets disagreed with this statement - ramping dramatically after an initial fall.

To me, the upside market action was inexplicable - not surprising in a world of machines and algos.

I simply don't know why the market rallied to the degree it did. I let go of my longs and shorted the rally late in the day as I do not see a benign market or economic outcome.

My conclusion is that it could have simply been a vicious Bear Market Rally - as I remain of the strong belief that late 2021/early January 2022 marked an important and broad distributive market top.

Stick With Quality

From a financing standpoint the Fed's actions mean the cost of capital will rise - it already has in the last four weeks with rates rising and the junk bond market deteriorating in price with widening spreads - and access to the capital markets will narrow.

This backdrop should result in increased dispersion, known as a stock picker's market.

I have a lot of experience analyzing companies - large, medium and small - in a host of industries and categories and I currently sit on public Board of Directors, and have been on many others in the past.

My experience participating on those Boards and based on my decades of analysis suggest that tightening financial conditions will translate into a meaningful financing and liquidity headwind to smaller and even some medium-sized companies.

My advice? No more gewgaws and stick with quality. You do not want small, speculative companies with modest or no profitability in your portfolios in a late stage market and economic cycle.

Trading Aggressively

In the fullness of time, tightening financial conditions will also likely be a headwind to equities.

I have expressed the view that this is a trading sardine market and not an eating sardine market - providing great opportunities to trade and not so great opportunities to invest (buy/hold).

In recent weeks you can vividly see the sometimes frenetic trading tactics I am employing - with little interest of investing.

This will change and will return to the land of the living and investing - but not in the current heightened regime of volatility, with valuations so elevated and with a wide range of uncertain outcomes, many of them adverse.

Remember, trading is more difficult than investing because it requires way more decisions. And the more decisions one makes, the more likely to make a mistake!

Bottom Line - The Business We've Chosen

"I heard it, I wasn't angry.

I knew Moe, I knew he was headstrong, talking loud, saying stupid things.

So when he turned up dead I let it go.

I said to myself this is the business we've chosen.

I didn't ask who gave the order because it had nothing to do with business."

- The Godfather

Stick with quality in a mature economic and market cycle.

Trade sardines, don't eat sardines.

This too shall pass, but for now this is the strategy I have chosen.

"$2 million in a bag in your room. I am gong in to take a nap.... When I awake and the money is on the table I know I have a partner. If it isn't I know I don't."
__________

Peter Boockvar chimes in on Powell's prepared (and more hawkish) comments this morning:  

With Jay Powell having already spoken last week at the FOMC press conference, today's prepared comments didn't reveal anything new but he reminded everyone that a 50 bps rate hike at a meeting is not out of the question and he'd be willing to hike rates above what their economically driven models say the neutral rate it is. He also acknowledged the challenge of engineering a soft landing while being certainly hopeful that he can pull it off.

I'll say again, as the Fed progresses down this path of both hiking rates (although already priced in to the short end) and shrinking their balance sheet (where asset prices have been so dependent and addicted to QE in expanding multiples and compressing credit spreads), there will be no such thing as a soft landing. The only question is how much of an economic slowdown are they willing to tolerate in order to quell consumer price inflation at the same time asset price inflation deflates along with balance sheet shrinkage. There is no answer yet to that question because we'll only know it when we get there.

Treasury yields are breaking out further to the upside with the 2 yr now at 2.07% (which I would be buying) and the 10 yr yield at 2.27% (which I would not). The Treasury market was already under pressure prior to the release of the comments because it was another bad day in European credit with yields up mostly 8-9 bps across the board. The UK 10 yr yield was up 13 bps today in particular. I'll also say for the umpteenth time, analyze all you want the US economy but where European bond yields go and what the ECB does will have a major impact on US bond yields.

Also of note today, the 2 yr inflation breakeven is higher by 7 bps to 4.76%, a new high. The 5 yr breakeven is up by 4 bps to 3.63%, 1 bp from a high. The 10 yr is up by 2 bps to 2.92% after peaking at 2.97% on March 11th. In other words, the further rise in commodity prices have overwhelmed the markets belief of Fed rate hikes and their ability to containing inflation.

US 2 yr Yield

10 yr Yield

2 yr Inflation Breakeven

I am getting shorter by taking in (covering) some of my short (SPY) May puts.

"I am going to write a good Diary on Real Money Pro today... and I am going to help people. Because I am good enough, I am smart enough and doggone it, people like me."- Daily Affirmations With Dougie Kass

Today's Affirmations is about the wheat prices and General Mills (GIS) .

I remember back to a meeting with General Mills in the early 1970s when I was an analyst at Putnam Management in Boston. 

Wheat prices were up 50%. Units were up 10%. Need for seasonal credit up 55%. 

Seasonal credit was financed by GIS in the short term. 

Rates tripled short term - not hard to see that happening now. 

Interest expenses were way above forecast. 

Then, abruptly demand fell. GIS has a big earnings miss and went into the mother of all bear markets. 

This is the pain transmission mechanism. 

GIS reports this week. It should be interesting. 

"I am not a licensed therapist, though. I deserve good things. I refuse to beat myself up. I am an attractive person. I am fun to be with."

I reloaded on my (SPY) short at $445.27 just now.

I have a Board meeting from 11 am-12 pm.

Radio silence for the next 60 minutes or so.

Market breadth (crappy), heat map and biggest movers as of 10:36 am.

Breadth

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Heat Map

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Biggest Movers

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What has been priced in?

With Fed president Bullard the hawk outlier and Waller a notch or two down we have to assume the rest of the doves are likely more in line with what the short end of the bond market has already priced in, in terms of hikes, even now Kashkari who doesn't vote anyway. Thus, whether the Fed hikes another 150-175 bps this year, and 50 bps at a meeting here or there, much has been reflected in short end bond pricing. What has not been priced in yet fully to stocks (maybe only partly), because we just don't know yet, is the economic impact of this rate move as the economy responds gradually to the new reality.

What has not been reflected I believe also is an aggressive pace of QT ($80-$100b per month which is likely) as until the liquidity flow starts to reverse, it's hard to price in.

On the direction of the economy, the trajectory will slow, whether we technically see a recession or not, as consumers moderate the pace of discretionary spending as they have to pay up for necessities. Global trade is certainly going to slow for obvious reasons. The rate of change in government spending is for sure moderating from the aggressive pace of spend in 2020 and 2021. And residential and very likely commercial real estate will slow because of higher funding costs. The question then is what happens to capital spending and investment. If cash flow gets crimped, it will slow as well.

Thus, the yield curve is doing what should be expected here. If one looks at the OIS curve (overnight index swap), that reflects expectations for fed funds and the rest of the curve, the 2s/10s spread is just 5 bps. The 5s/30s has just started to invert with the 5 yr swap rate at 2.0% and the 30 yr at 1.98%.

Here is a fresh look at the broad commodity indices that I like to look at, the CRB raw industrials and the CRB food stuff indexes. The raw materials index closed at a fresh record high on Friday. The CRB food index closed down Friday off its record high.

CRB Raw Materials Index

CRB Food Index

So many seem to be expecting China to cut rates to cushion their weakening economy (like pavlov's dog, economy slows, give us lower interest rates) but they did not do anything last night, leaving their loan prime rate unchanged. A positive in China is if they are finally waking up to the futility of their covid approach which seems to be happening. Hong Kong made announcements last night that they are further cutting quarantine days to just 7 for incoming travelers and is ending incoming flight bans from 9 more countries.

Shenzhen on the mainland also was quick to have its factories reopen. The world's economy can certainly use more economic output from the 2nd largest component. I've said before, the world can also use the spending money of Chinese tourists, the largest cohort in the world that really has only allowed to travel domestically over the past two years.

Chinese stocks took a breather overnight after the rebound last week.

South Korea, a key exporter of semi's and auto's, said exports rose 10.1% y/o/y in the 1st 20 days of March. That is a moderation from the 13.1% increase in February but still a good pace and shipments of semi's in particular jumped by 31% y/o/y. Imports were higher by 19% y/o/y vs 12.9% in February but that is influenced by higher energy prices being paid. The Kospi did give back .8% from Friday and also off the really last week with Samsung Electronics in particular down 1.1%. South Korean stocks are cheap but they always seem to be because of the Chaebol structure.

As Christine Lagarde doesn't see any signs of stagflation as she said today, Germany said its February PPI rose 25.9% y/o/y and by 1.4% m/o/m, although both were .3% less than expected. That is also pre war data with energy prices up 68% y/o/y. Still, non energy goods were still up between 5-8%.

Of note in bond land, the German 10 yr bund yield is up another 2.4 bps to .40%, the highest since November 2018. Just as the Fed with their economic projections included economic pixie dust that the fed funds rate can go from zero to about 2% this year and almost 3% next but the unemployment rate is magically going to stay around 3.5% over the next 3 years, Lagarde today said "even in the bleakest scenario, with 2nd round effects, with a boycott of gas and petrol and a worsening of the war that goes on for a long time - even in those scenarios we have 2.3% growth." Pixie dust.

German PPI

German 10 yr Bund Yield

I covered my short term rental in (QQQ) at $346.82.

I plan to reshort on a rally.

Given his extraordinary inventiveness, it is a bit more than a little presumptuous to say we and several other traders can empathize with Stubblefield, but last week we did see events kind of sweep over what had been a functioning pattern that this year had brought us some success.

The annual trading pattern had stood us in reasonably good stead this year that is up until this past week.

As you recall, the presumption was that we might see a top or at least a short term high on Tuesday and at worst Wednesday, but the market continued to rally and rally strongly throughout the end of the week and even Friday's expiration action did nothing to take away from it. They took in all of the geopolitical stuff from the Ukraine and, with only a few bumps along the way, we managed to see the bulls stay in charge and maintain that control very handily.

Additionally, the breadth numbers were pretty good and held together. Now, it will be interesting to see if the annual pattern begins to reinsert or if as several of the media pundits have claimed, we have, in fact, bottomed from the selloff from the highs we that we saw shortly after year began. The moves by the Fed were absorbed and, in fact, cheered on by the markets as they seemed to endorse the idea of multiple raises this year and took Powell at his word that they would be data dependent and move carefully without overdoing things and, as I say, the bulls had nearly complete control.

There were few signs that the game was over, but I think we will now move in to see if seasonal or annual patterns absorb and resume. So, we will see if we get a little weakness heading into the end of March and where that leads. We should note, however, that we went from heavily oversold at the beginning of last week to moderately overbought at the end. Quite a swing indeed. The weekend headlines were not potentially eventful looking so we are back to watching the newstickers.

Overnight, at midnight, the markets looked relatively calm. Japan is closed for the Vernal Equinox and trader folklore has long said that equinoxes tend to be focal points at which markets sometimes shift direction. The Autumnal Equinox has been noted by many traders, including the famous WD Gann as a point in which markets tend to change direction although the Vernal Equinox does not quite have the same history. A key feature overnight was the price of oil, which shot up.

There were rockets fired at Saudi Arabia refineries by the Houthis from Yemen. That tended to put a very strong bid under overnight oil as well as a residual bid from the Russia/Ukraine situation with Zelensky saying that if negotiations don't occur quickly, we run the risk of World War III. The nuclear blackmail seems to be becoming more evident by the day and the concern is that if they had to use them, the Russians won't limit it to Ukraine or even Europe. That they might, in fact, strike out against North America if they thought that was necessary. Thankfully, that is not really reflected in the markets as of yet.

As we move closer to dawn in Manhattan, word came of a Chinese airliner crash, which may have killed 130/140 people. The original reports are that it is a Boeing 737, and the concerns were that it might be a 737 Max, which, you will recall was the refitted plane that shut down Boeing's operation and a lot of air travel for a couple of years. It appears that it is a straight 737 and not one of the Max variants. Asian and European markets are generally mixed with not significant changes occurring. Given the Boeing weight on the Dow, the opening as dawn hits Central Park is for a Dow down opening of a 100 points, but it is a long time to go.

So, once again, we will be standing by the newstickers. Keep your seatbelt fastened and please try to stay safe and Happy First Day of Spring to you and yours.

(Editor's Note: I am scheduled to be on CNBC Squawk on the Street telephonically at 10:30 this morning.)

After reviewing last week's FedEx (FDX) EPS release, I have sold my position at $222.21.

We are at the top end of my risk range now.

Adding to (SPY) and (QQQ) shorts at $445.38 and $350.73, respectively.

* The asymmetry of Federal Reserve policy responses and the misguided fiscal/regulatory actions are joined at the hip

* It remains my view that inflation will be far stickier and more elevated than the consensus expects

* The conflict between Russia and Ukraine further exacerbates supply chain dislocations and lengthens logistical problems

* "Slugflation" lies ahead - global economic growth and U.S. corporate profitability (profits and margins) are likely to disappoint relative to expectations

* More on the $23 pastrami sandwich...

Without arguing about how appropriate the Fed's policy response was to 2008, which like 2001 was a crisis they actually helped to create by being too loose in the first place, and Covid, both in terms of actions - including buying risky public debt in violation of the Federal Reserve Act via an SPV set up with BlackRock (BLK)  - and the duration of those actions, an analysis of the 2019 rate cuts is more instructive and simpler. 

In 2019, GDP was 2.3%, unemployment was 3.5%, and inflation was 1.9%. And the Fed still cut rates 3x, by 75 bps total, and dropped the Fed Funds rate from an already below trend 2.5% all the way down to 1.75%. In case it is not clear, GDP was still okay, unemployment was low (below target), and understated gimmicked CPI inflation was at target levels which means in real life it was above target levels. Yet all it took was the theoretical, but yet to be realized, threat of slowing growth for the Fed to go on a rate cutting spree. 

I could understand the rate cutting spree if rates were at 5% then, but they weren't. Policy was already extraordinarily accommodative by any standard, and things were fine. Yet cut they did. Probably because President Trump told the Fed Chairman to do it, because an election was coming up. Chairman Powell went right along with it because he wanted to keep the job. So much for an apolitical Fed, but that ship sailed along time ago sadly thanks to President Nixon and the then Fed Chair Arthur Burns, and was made worse by Greenspan, Yellen, Bernanke and Powell. All products of politics, "group stink" and a broken system. 

Compare then to now. Inflation is through the roof, and has been for a long time, including gas prices, well before anything in Ukraine happened. Yet with inflation running at 1970s levels when calculated the same way, we are still pouring gas on the fire. QE stayed in place, until now, and Fed Funds was kept at effectively zero, and basically still is at effectively zero with the single 25bp increase. 

If this is not a completely asymmetric set of policy responses, I don't know what is. Frankly, the Fed is and has been in gross violation of its mandate. 

There are a lot of reasons why this has happened. None of them good, and none of them are true to the ideals of the system we are meant to have. Part of the problem is politics and short-termism and vote buying. Part of it is the avoidance of short term pain. Cutting a rotting limb off a tree hurts, but ultimately the rest of the tree grows stronger. Getting cancer does not hurt in an acute fashion for a long time. In fact, many cancers are not noticed for years. Often a slow death follows, and it does not even become acutely painful until the end. It seems we prefer cancer to cutting off tree limbs. 

The policy asymmetry has also been justified by fake self-serving models. Amongst other things, these models show that the pain from a mild recession is never made up by the recovery that follows. I call BS on this too. Although aggressive monetary and fiscal policy responses can mute volatility in economic cycles, they also come with a cost. Imbalances build up over time, many of which we are seeing now, societal, structural, and economical. And interference with capitalistic cycles only robs the system of longer term growth in GDP, employment, and wages.

The proof is in the pudding. GDP grew at an average rate of 5.2% from 1934-1970, with a standard deviation of 6%. When the activist Federal Reserve kicked in starting with Arthur Burns, average GDP growth has been halved since 1970 to about 2.5% in 1971-2022, and the standard deviation also dropped to 2% and change. I can't prove this is the fault of activist and political monetary policy, but those who disagree and would argue this is due to other factors cannot prove otherwise either. All I know is that the data is the data, so advantage me and my perspective! We have in part (not fully) stagnated due to the combination of terrible fiscal and monetary policy. 

As for what to do know, it is complicated, and will take too much space. For the time being it is easier to talk about what NOT to do. 

What not to do are things like below, where Maine is going to start handing out gas and food relief checks to residents. At least in Maine's case, this is acceptable. They have a budget surplus. But whatever this surplus was, it is now worth less, due to inflation. And now they have to spend what remains of the value on entitlements as opposed to improvements. 

At any rate, the Federal Government, and many states, do NOT have a surplus. Any money printing to try and cover for the problem will only make the problem worse. We cannot do these things. 

The correct way to solve for these problems is better policy, better fiscal discipline, and having an apolitical Fed that is grounded in reality as opposed to group stink and monetary experiments. 

Stupid gimmicks to try and solve for problems that are caused by poor policy only make the problems worse over time, and can lead to disasters. Over the short-term, how did President Nixon's price controls work out? Many also forget, President Nixon was also faced with soaring food prices. To solve for that he introduced the corn subsidy. That led to high fructose corn syrup going into all of our food.

Now the average American is 30lbs more than they were in 1970, and healthcare has gone from 7% of GDP to 18% of GDP. Obese Americans did not cause all of this, but they are a big part of it. Obesity, coincidentally is a big part of the Covid problem as well. Now in order to trying and bring oil price down for the short term will we give Iran Nukes for the long term? The obesity problem will be small potatoes in comparison to this one, or sadly well done potatoes! 

Gimmicks and laying blame on Putin or U.S. corporations do not work, they only cause bigger problems. The only thing that works is pragmatic common sense policy. (Side note, this thread is interesting on our universities, and student debt.) 

The picture at the bottom of this missive is another example of where we are now. $11 for a burger, fries, and diet lemonade. Not a habit for me, every now and then I can't help myself. This might be more offensive than the $23 pastrami sandwich - which I had discussed in a previous column all the way back in mid-November: 

Nov 17, 2021 ' 08:30 AM EST DOUG KASS

The Pastrami Sandwich Misery Index

Consider this a thought exercise as a follow up to last week's column, "Stocks May Soon Pay the Price for Policy Miscues Currently Being Made by Yellen and Powell."

I may not be perfectly correct, but I am probably directionally right, at a minimum.

Shelter is 30% of the CPI. Owner's Equivalent Rent (OER) makes up about 75% of the shelter calculation or ~23% of the total CPI.

We moved from using the actual cost of owning a home, to rental equivalence in 1983:

"On October 27, 1981, Commissioner Janet Norwood announced that BLS would convert the CPI for All Urban Consumers (CPI-U) to a rental equivalence measure for homeowner costs, effective with data for January 1983." (This method was revised again in 1983, 1987, and 1998 as well further pushing the reported numbers down).

Now home prices are up 20% year over year but OER was reported to be up 3%. With mortgage rates unchanged, the cost of financing a house has not materially changed over the last 12 months, and insurance and utilities and taxes have all gone up - increased appraisals. The difference between 20% and 3% is 17%. 23% (weight in the CPI) of 17% is 3.9%. Again there may be a good argument against calculating shelter cost this way, but this is basically how we did it in the 1970s.

Add the 3.9% to the 6.3% reported, we are up to 10.2%. There is your 1970's inflation. It is not too hard to find another 2%-3% on top of that for the average person either. The composition of the basket itself, hedonics, substitution, other methods of massage and statistical torture, there you go.

Low teens inflation!

Maybe the guys that calculate inflation today using the 1970s methodology that results in 15% are not too far off from what today's inflation would be if measured the way it was then.

The other way to think about it is if inflation in 1970 was calculated the way it is now, the numbers then would have printed at lower rates. It may be we erred in the direction of too high then, and too low now. Truth may be in-between.

I lived through both, it feels the exact same now as it did then. Maybe 8%-12% then, 8%-12% now, or something of that ilk, measured apples to apples by methods that are designed to be as fair as possible as opposed to massaging the number down as much as possible.

Do Not Mess With a Man and His Pastrami Sandwich!

All I know is that a friend from Boston told me that a pastrami sandwich he ordered on Saturday was $23. He didn't even know the price and he ordered two. When the cashier swiped his credit card, and it indicated $46 (before tax) he asked my friend how much he wanted to tip. My friend then said "excuse me, there must be some mistake, I didn't order the prime ribeye?" The cashier told him that the price of pastrami doubled over the last few months. Double means up 100%.

Do not mess with a man and his pastrami sandwich!

Coincidentally there is this...

On inflation: Six is Really 10 & the Causes and Symptoms are Similar to the 1970s:

On an apples-to-apples basis, the 6% increase in the consumer price index in the past twelve months is 10%-plus in the Burns era since house prices are up nearly 20% in the past year, while owner-rents are up a mere 3%. Statistically, 2021 consumer price inflation is the highest in 30 years. Yet, when actual prices are measured, it is one of the highest inflation rates of the post-war period, matching the double-digit increases of the 1970s and early 80s. Policymakers appear to be repeating the mistakes of the 1970s, as they are ignoring the inflation side of the equation to hit their employment mandate. That old trade-off doesn't work. The longer Powell follows the Burns-policy approach of the 1970s, the risk the inflation cycle triggers a hard landing in the economy. Investors forewarned.

Follow up to the Morgan Stanley chart below:

Consumer confidence is telling you inflation is understated when using the misery index as a guidepost. Assuming unemployment is right (using U-6 to be conservative) then the chart suggests inflation is really 12%.

The Misery Index is the unemployment rate plus inflation. It's 14 on the chart but consumer confidence says it should be 20. Add six to reported CPI inflation and voila, 12%! We had the same divergence in 2008-09 when oil was $150.

The consumer knows.

As far as the pastrami sandwich misery index goes, it should be stated that it was a Boston pastrami sandwich. New Yorkers may be thinking that is cheap! But my friend reports that the same Boston pastrami was $17 not too long ago, and it is also not so thick that you can't eat it. I checked the price of a pastrami Reuben at a New York deli yesterday - its $28 now, and another $14 for the individual portion potato latkes. They better not be charging for the apple sauce on top of that!

Also on the topic of food and the CPI, food away from home only clocked in at up 5.3% year over year!

Yeah, I have a bridge to sell you too.

I also wonder if they account for the 4% kitchen admin fees that have suddenly emerged, the 2% COVID surcharge, the bread that used to be free that is now $4-$8, the smaller portion sizes, the lower quality ingredients (hedonics remember?), cocktails that are now equal per ounce as silver - I am not kidding, would love to see a chart of cocktail prices vs. metals if that is possible which I doubt - and waiting an extra 20 minutes for everything because they can't get staff? Obviously the statisticians don't, but if doing so made food appear cheaper you bet they would!

But the Administration tells us this is not an issue, I guess they also believe a lot of economists are not really economists?

"Americans are seeing their dollars, their paychecks stretched right now," NBC's Peter Alexander said at Monday's White House press briefing. "Why should Americans not be concerned that injected another $1.57 trillion or more would raise inflation?" "Because no economist out there is projecting that," Psaki replied.

This morning's comments (above) are a follow up to this missive on the same subject a week ago:

Stocks May Soon Pay the Price for Policy Miscues Currently Being Made by Yellen and Powell

* In 2022 the Fed will likely be forced to suddenly slam on the brakes in order to quell inflation

* The casualties will probably be demand destruction, a visible downturn in economic growth and weakness in equities

"Once again, the Fed is misreading inflation dynamics. Policymakers continue to argue that the current inflation cycle is temporary, centered in few products and industries, and will unwind as bottlenecks dissipate. Inflation cycles are not static or linear; they rotate and broaden. The next phase of the inflation cycle will be in consumer services."

- The Carson Report, Another Fed Misread: Inflation Cycles Are Not Static -They Rotate and Broaden

If inflation was measured today in the same way it was measured then - 2021 inflation would be as high as in the 1970s, see here.

As a consequence, the Federal Reserve - led by Powell who wants to be reappointed, and abetted by Treasury Secretary Yellen - is allowing inflation to accrete by continuing QE.

At the same time, fiscal policy is out of control.

Inflation Now

Using 1980 methodology - not perfect, but in the zone - inflation is close to 15% today.

Yellen, et. al, are making the bet that when inflation laps the tough comps, inflation will fall.

By that logic, if inflation was 100% now, and then was 2% next year, she would be right and everything would be fine, except for the fact that we would be broke.

Further using this logic, anytime inflation is above target, they can always say it is transitory and will come back down.

But you could say the same thing about deflation, when it is lapped, eventually inflation will return.

Also, if inflation reports up 16%, then if lapped and was down 8%, they would consider it a disaster, even though the two year average would be well north of what is considered price stability.

The Adverse Consequences Seem Baked In

Basically it is all a word salad of BS and a policy error - with all its adverse consequences - seem baked in.

It is my view that based on real interest rates monetary policy is more easy now in November, 2021 than it was in March, 2020.

Another point is that that you never recover the purchasing power. Every dollar holder is out that 6%-plus, measured year-over-year, regardless of what happens next year.

The reason the price level - always hard to measure - was more or less unchanged over multi-decade spans under the gold standard is the inflationary episodes alternated with deflationary ones. In the absence of deflation, there's no make-good, only varying rates of permanent loss.

No wonder Bitcoin is having a party!

Regardless, we do not have apples/apples compares as the methodology for calculating the CPI has changed substantially over time.

1970s inflation was not measured the same way inflation is measured now. As I understand it, the numbers in the CPI series have not been restated going backwards. Thus, we are comparing apples and oranges.

When Yellen, Powell and the others say we are not and won't experience 1970s like inflation, she is being very disingenuous. The numbers were measured differently. 15% then could be close to equivalent to 6% now, the way the calculation has changed. 6% now could be close to 15% then, or even 12% then. It is hard to know, but we are dealing with apples and oranges. The guys that try to adjust the numbers say we are in the same place now as then. If they are off by 3%, it doesn't really matter. The 6% is really 12% as opposed to the 15% they estimate. 12% is still 1970's like inflation. As is 10%, 8%, or even the 6% that just printed.

My eyeballs tell me inflation is running a fair bit hotter than what is being reported now. I think the average person would also think that based on their buying experiences today.

This is all sort of like nerd stats in baseball. The nerds tell me Jackie Bradley Jr. is a great baseball player based on contrived statistics about his fielding ability. My eyeballs tell me he sucks. His salary tells me that as well, because the guys making the actual decisions and spending the real money realize the nerd stats are contrived garbage.

Regardless, you never get it back once it happens.

It is not a victory if the CPI only grows about 2% next year. For most people (not Jeff Bezos), they have been permanently impaired by what happened this year. Real weekly earnings are reported as down -1.6% (year over year), reality is probably a fair bit worse.

Also how do you measure the cost of empty shelves?

Finally, this is interesting as well... owner's equivalent rent still has a lot of catching up to do to actual housing inflation (OER only up 2.9% versus housing prices up 20%)!
__________

Between $17 and $20.50 per hour is now the starting wage at In-N- Out Burger 

This is all out of control. 

If this is not a wage price spiral, I don't know what is. And, no, the people making $17-$20.50 per hour are not better off all the sudden - at the expense of the wealthier - they are actually getting screwed the most. Frankly, I am even surprised they can afford to drive to work. In fact, many can't afford a car anymore, and take Uber (UBER) instead. But now Uber is adding a fuel surcharge, so that is going to be a problem. Even funnier, the fuel surcharge is in effect for the EV's that drivers have. 

As to the equity markets... when it comes time to sell, you won't want to!

For me, I plan to expand my short exposure as my baseline view is that: 

* Inflation will remain more elevated and far stickier than most expect

* The conflict between Russia and Ukraine further exacerbates supply chain dislocations and logistical problems

* Slugflation lies ahead

* Domestic economic growth and U.S. corporate profitability - profits and margins - are likely to disappoint

This morning the yield on the two year US note breached 2.00% (+6 bps) - that is the highest level in over three years and a good indicator of where the Fed Funds rate is going:

* Could Putin fall?  See here and here.  

* Silicon Valley's wealthiest Russian distances himself from Putin.

Lisa Abramowicz tweeted out declining housing affordability this morning. 

Now Danielle DiMartino Booth follows up:

The biggest impediment to making historical comparisons is that there are too many of them. The strong dollar is problematic. But the same can be said of any number of other issues including valuations, inflation, a Federal Reserve that's in a tightening mode, credit risk that's rearing its head and slowing global and U.S. domestic growth.

• At times like these, leaning on the most tried and true indicators - autos and housing -- can help cut through the cross currents. Per Dealertrack, credit applications to buy a vehicle were down 20% year-over-year; the weekly trend has been weakening. As for housing, today's graphs paint a picture of a market that's being attacked on multiple fronts.
• The pipeline of single family and multifamily supply has been higher than today in 1973 and 2006 (upper left).
• The precedents for homebuilders' expectations being hit as hard as they were last month number three - December 1987, November 2018, and April 2020 (upper right).
• As the headlines blared Friday morning, making that house payment in February 2022 was 28% costlier than it was 12 months prior; mortgage rates' rise is but one aspect of unmatched historical unaffordability (lower right).
• And finally, since peaking in December 2020, existing home sales in the Northeast have fallen 21%; the lagged collapse in homebuilder sentiment has come on with the abruptness of a slap in the face (bottom left).

Housing in the Northeast was the first to benefit from the exodus to the exurbs; logic dictated it be the first to flame out. Housing is as much of a Monster Mash as broader historical backdrop precedents.

Two tweets from Lisa:

More problems for Boeing (BA) :

I was out of the office Friday and not available to post. 

Here were my trades - I posted late Friday on my return to the office: 

dougie kass

I managed my risk ok but it was a very weird day - another day I cant explain
I am glad there is no trading in the next two days!
1. Covered small SNOW short for a loss
2. Covered all my SPY and QQQ shorts at around 520 am at $436.04 and $341.83
3. Covered GDDY for breakeven
4. Shorted (smallish) SPY and QQQ late in the day at $442.92 and $351.08
5. Sold all of my TLT long at $133.20
6. Shorted more SPY March $434 puts (didnt disturb my short calls)
Dougie

A bonafide threat to housing:

* The market (and money) never sleeps

"Workin' on our night moves
Trying to lose the awkward teenage blues
Workin' on our night moves
In the summertime
And oh the wonder
Felt the lightning
And we waited on the thunder
Waited on the thunder."

- Bob Seger, "Night Moves"

I described the importance that overnight futures trading holds for me in this column a few weeks ago. It is a guidepost to my strategy in the regular trading session.

Moreover, the overnight/early morning futures holds opportunities as it is (1) inefficient, though liquid, and (2) it seems fear and greed is often exaggerated outside the regular trading session.

It was a neutral evening/early morning for futures. Gold fell back (-$4) and Brent crude was +$4 to $112/barrel (bearish for stocks).

S&P futures peaked at +10 and bottomed at -23. At 5:26 am ET they were at -8.

Nasdaq futures topped out at +25, dropped as low as -105. At 5:27 am ET they were at -57.

I eliminated my (TLT) long on Friday and modestly increased my net short exposure in the Indexes, covered early in the morning and reshorted late in the day: 

* Covered all my (SPY) and (QQQ) shorts at around 520 am at $436.04 and $341.83

* Shorted (smallish) SPY and QQQ late in the day at $442.92 and $351.08

* Sold all of my TLT long at $133.20

* Shorted more SPY March $434 puts - didn't disturb my short calls

Here are my trades this morning (around 5:30 am):

dougie kass

Monday morning (premarket) trades - 5:35 am:

* Shorted QQQ $350.18

* Shorted SPY $444.26

Dougie