Message to the Fed: Grave Dangers of a Hard Landing

By Victor Sperandeo with the Curmudgeon


In the words of Oliver Hardy of the famous “Laurel and Hardy” comedy duo: “HERE’S ANOTHER FINE MESS YOU’VE GOTTEN ME INTO!”

Fed Shocks Markets:

At a news conference last Wednesday, after the Fed raised rates the expected 75 bps, Chairman Jerome Powell said the Fed had increased its Fed Funds dot plot from 3.4% in June to 4.4% by year-end, implying another 125 bps of hikes over the next two FOMC meetings in November (six days before the U.S. mid-term elections) and AGAIN at its December meeting (Merry Xmas)! That would bring the Fed Funds rate much higher (4.4% or 4.25-4.50%) than expected by the end of 2022. In addition, the Fed’s 2023 dot plot was bumped up by another 20 bps.

The Fed also raised its 2023 unemployment estimate to 4.4% from 3.9% and its core PCE projection from 2.7% from 3.1% (which is probably optimistic).  Equally important, the Fed cut its 2022 GDP forecast to almost zero at 0.2% from 1.7% and by 500 basis points to 1.2% in 2023. 

“We believe a failure to restore price stability would mean far greater pain later on,” Jerome H. Powell, the Fed chair, said. He acknowledged that the Fed’s rate increases would raise unemployment and slow the economy. 

-→Thought Fiona was bad?  Get ready for Hurricane Fed!

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Professionals React to the Fed’s News Conference:

1. Bill Zox portfolio manager at Brandywine Global said, “As the Federal Reserve vows to continue raising interest rates to tamp down on inflation, investors should brace for additional hikes of 75 basis points in the future.”

“I believe 75 is the new 25 until something breaks, and nothing has broken yet,” Zox said. “The Fed is not anywhere close to a pause or a pivot. They are laser-focused on breaking inflation. A key question is what else might they break,” he added.

2.  Goldman Sachs cut its year-end 2022 target for the S&P 500 index by about 16% from 4300 to 3600.

"Based on our client discussions, a majority of equity investors have adopted the view that a hard landing scenario is inevitable, and their focus is on the timing, magnitude and duration of a potential recession and investment strategies for that outlook," wrote Goldman analyst David Kostin.  He said inflation has proved more persistent than expected and is unlikely to show clear signs of easing in the near term, leading to even higher estimates of Fed tightening.

"Most portfolio managers believe that in order to corral inflation the Fed will have to hike rates sufficiently high that it will result in a U.S. recession at some point during 2023," Kostin added.  His remarks early Friday morning likely contributed to the market’s big selloff with the DJI making a new yearly low.

3.  BofA Global Research strategists wrote in a client note that the dramatic losses in bonds (much more below) imperils “the world’s most crowded trades”:  the dollar, U.S. tech stocks, and private equity. The threat of a “credit event”—the polite term for a crash—also looms.  The preconditions that led to the October 19, 1987, crash are mostly present, BofA warned. These include a volatile geopolitical backdrop, abnormal U.S. markets far outperforming the rest of the world, and the lack of international coordination. 

Curmudgeon: Unlike 1987 when the U.S. dollar was weak, this time it’s super strong (DXY +21.1% in last year), which could precipitate a currency crisis.  Developing countries could default on their sovereign debt while overseas inflation (especially for oil which is priced in dollars) would accelerate till something breaks.

BofA thinks there is more pain for markets ahead and they don’t see an ultimate stock market low until yields peak.


Victor’s Analysis:

Since the U.S. is currently in a RECESSION (or ZERO economic growth as the Fed forecasts) further rate increases coupled with QT (Fed’s balance sheet to decline $95 billion per month until further notice), ensures a “hard landing” or serious recession.  It could get worse.  We should be prepared for a “Depression” and the markets to thereby CRASH! 

Conversely, what would make the markets (stocks, bonds, gold, commodities, etc.) rally?  Let us know if you have an answer!

Once a nation is in a Depression it does great harm, as large amounts of capital are lost, especially to small businesses which go bankrupt. That greatly increases unemployment as small businesses hire the most workers. Therefore, getting out of a depression economically is very difficult.

Rosenberg Research: “The die is cast. The Conference Board's LEI fell 0.3% in August and is down six months in a row at -5.3% SAAR. This has a 100% track record of predicting recessions back to 1959. Same pattern we saw from June-November '07. Recession started in January.”

The problem we face is not an economic issue. It is due to the politicians at the Fed that want to change reality.  Jerome Powell is a Federal Reserve Chairman who casually dismisses the monetary lessons of Milton Friedman and does so not only at his own peril, but the country's. 

The Fed’s fantasy of wanting to cure inflation quickly is by hiking interest rates at record rates and driving markets down. A better course would be to limit money supply growth to 4-5% annually without jumbo rate hikes at every FOMC meeting.         

Sidebar– Unemployment is a Lagging Indicator:

In August 1929 before the October stock market crash the unemployment rate was 0.04%. That was the month the NBER classified the top of the economic cycle. In June 1930, or 10 months later, the unemployment rate was the same as today in the US or 3.77%. However, in December 1930 it jumped to 11.89%. A year later 19.1%! So please understand the concept that the “unemployment rate” is a LAGGING INDICATOR. 

The amount of propaganda to fool the public on this not being a recession reality is like listening to TOYKO ROSE, as it repeats over and over.


2022 YTD U.S. Bond/Notes: Worst Decline in 97 Years:

What new mess has Fed Policy caused in 2022? Using the Fed’s power to crush the people, under the excuse of lowering inflation?

In the last 97 years when did the U.S. T-Bond/T-Note markets act like today under all conditions?  NEVER! 

Let’s examine the Intermediate Treasury ETF (IEI) compared to 97 years of history for a perspective of this year’s Fed monetary policy.  Reference: U.S. Treasury ‘Intermediate Notes”- Total Losses (includes coupon interest) 1926-2022 (96 years 9 months) Ibbotson Associates. 

·        The IEI (3-to-7-year Treasury ETF) is down -10.74% as of 9/23/22. That’s 109% more than any full year versus Intermediate Treasuries since 1926! 

·        The T-Note Intermediate Futures are down -14.74% YTD.

·        The Bloomberg Corporate Bond Index ETF (AGG) is down -14.8% this year as of this Friday. The Bloomberg U.S. Aggregate bond index declined -0.25% on Friday, September 23rd.  It’s down -4% in the last month and -14.08% over the last year (there are no expenses like an ETF has).

·        The TLT (20 year + U.S. bond ETF) is down -26.8% as of September 23rd.

·        Those numbers are by far the worst in 96.75 years!  The worst long U.S. bond annual loss was over that period was     -14.9% in 2009.

·        Global bonds have done even worse, as per the long-term chart below.  The Bloomberg Global-Aggregate Total Return Index Value (Unhedged) declined -0.85% on Friday and is down -19.31% YTD and -20.49% over the past year.  

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Chart courtesy of Bianco Research via Twitter


Curmudgeon Note:

In my 54 ½ year involvement with markets, I’ve never experienced anything like 2022!  As noted in previous posts, all asset classes are down this year.  Bear markets everywhere with no place to hide! 

Only the U.S. dollar has risen, but that is a negative for American investors in foreign stock and bond funds as well gold/ precious metal funds!

Even oil, which increased strongly in the beginning of the year, is now trending down in a big way.  On Friday, December WTI Crude Oil futures declined -$4.06 while the Profunds Oil and Gas 1.5X index mutual fund (ENPIX) was down -11.33%. 

Unleveraged gold and precious metals mutual funds were down 4.5% to 5% on Friday and are deeply negative for 2022 after being up through February.  One of the oldest such funds- VanEck International Investors Gold Fund Class A (INIVX) - is currently at a 52-week low and -32% 2022 YTD. 

--->Aren’t gold and gold/precious metal funds supposed to increase in value when inflation is high and above trend?

Market Comments (Victor and the Curmudgeon):

While the financial markets have been pummeled in 2022, the global economy has just begun its bubble popping phase.  As a result, expect a serious decline in corporate earnings as FedEx, GE and Verizon warned two weeks ago. 

Also, lower valuations due to higher interest rates should take the S&P 500 P/E down to the 12- 14 times area, assuming the Fed does not stop raising rates or end QT.

Jason De Sena Trennert, who heads Strategas Research, sees a profit recession that could cut 2023 S&P 500 earnings to just $200. BofA has persistently warned that earnings estimates are too high. The falling earnings estimates could mean the next leg of the bear market is upon us, Trennert concludes.

Using Goldman’s estimated 15 times P/E and Strategas’ $200 earnings projection implies an S&P 500 target of 3000. That would be an additional 18.8% decline from Friday’s close of 3693.23, which already is 23% below the benchmark’s closing high of 4796.56, hit on January 3, 2022.


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Watch BBB and CCC Corporate bond ETF’s which are now at (LQD) or approaching (HYG and JNK) the lows of March 2020. The junk bond defaults that would occur in a serious recession or depression would be much worse than the Lehman Brothers bankruptcy in September 2008, which froze credit markets for months.

Victor’s Conclusions:

Powell and his gang of Fed cohorts have no idea what they are doing.  Continuing with jumbo rate hikes and QT when inflation is trending down and zero U.S. economic growth this year? Be prepared for chaos and crashing markets!

The Road to Serfdom:

“Society will develop a new kind of servitude which covers the surface of society with a network of complicated rules, through which the most original minds and the most energetic characters cannot penetrate. It does not tyrannize but it compresses, enervates, extinguishes, and stupefies a people, till each nation is reduced to nothing better than a flock of timid and industrious animals, of which the government is the shepherd.”  …………………………………. Alexis de Tocqueville

Tocqueville (29 July 1805 – 16 April 1859) was a French aristocrat, diplomat, political scientist, political philosopher, and historian.

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Be well, stay healthy, try to cope with the financial chaos to come. Wishing you peace of mind, and till next time………

The Curmudgeon

Follow the Curmudgeon on Twitter @ajwdct247

Curmudgeon is a retired investment professional.  He has been involved in financial markets since 1968 (yes, he cut his teeth on the 1968-1974 bear market), became an SEC Registered Investment Advisor in 1995, and received the Chartered Financial Analyst designation from AIMR (now CFA Institute) in 1996.  He managed hedged equity and alternative (non-correlated) investment accounts for clients from 1992-2005.

Victor Sperandeo is a historian, economist and financial innovator who has re-invented himself and the companies he's owned (since 1971) to profit in the ever changing and arcane world of markets, economies, and government policies.  Victor started his Wall Street career in 1966 and began trading for a living in 1968. As President and CEO of Alpha Financial Technologies LLC, Sperandeo oversees the firm's research and development platform, which is used to create innovative solutions for different futures markets, risk parameters and other factors.

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