What If the Bear Market Isn’t Over?

A few weeks ago, I said the bear market was over. What if it isn’t? Don’t interpret this as cold feet—it’s good to understand the other side of the argument.

Basically, there is only one side of this argument: The Fed will never stop hiking interest rates. Right now, it sure seems that way. There has been no talk of even a pause. We even learned that Minneapolis Fed President Neel Kashkari was “happy” stocks fell lower after Chairman Jerome Powell’s speech at Jackson Hole.

We learned on the way up that you shouldn’t fight the Fed, and we are learning on the way down that you shouldn’t fight the Fed. Especially when they are rubbing their hands with glee and twirling the Snidely Whiplash mustache when stocks fall.

With that monetary backdrop, it’s hard to get bullish. But let’s operate in the real world here. How high could the Fed conceivably hike rates?

Well, inflation is currently at 8.5% (and probably going lower). So, it’s conceivable that the Fed could hike rates to 8.5%. But that is not realistic. What is realistic? 4.5% is realistic. Maybe five. At that point, it would be irresponsible for the Fed to continue without pausing to evaluate the effects of the rate hikes. Of course, they are not acting very responsibly at the moment.

Water Torture

Criticizing the Fed has become a national pastime. You don’t see too many people saying the Fed is doing a good job. Practically none. At various points in history, I have thought the Fed did a good job. I thought the rate hikes going into 2000 and 2007 were thoughtful and measured, though Alan Greenspan made one big mistake along the way—waiting too long to raise rates in 2003. That error proved costly.