Did the world just end? A crazy high 75 bps interest rate hike crashed the market for the week ending Thursday 6/16/22. Whether or not this bubble burst was warranted according to the academics, in the real world, this represented a huge amount of wealth destruction. Ordinary Americans saving for things like retirement and college will not be quick to forget this latest round of market instability or the Fed’s insensitivity to their financial frailty. A huge financial services industry has long pushed the narrative that stocks need to be a core portfolio holding to meet savings goals and now we come to see that the Fed is not honoring their end of the bargain to treat the capital markets gently. In anticipation of this, many diversified into cryptos which promised to be a hedge against a profligate Fed only to find this week that their punishment was even more severe. One lesson to learn from this week’s carnage is that there is no place to hide from the Fed’s blunders. Maybe it is time for society to consider if a few unelected Fed board members should hold so much sway over the country’s financial future.
The question that should be on everyone’s mind is how will the Fed’s humongous interest rate hikes help tame inflation? In our post, how does higher interest rates lower oil prices, we highlight the fact that the sky-high price of gas is not from an overheated economy (with 1Q22 GDP down -1.4%), but from a supply shock. It’s crazy for the Fed to bludgeon lower already tepid demand with these rate hikes. Taking a further look at energy, we explore how the rising cost of oil extraction is making gas too expensive for consumers and perhaps the real reason for the push towards green energy. Lastly, we put the Great Resignation in perspective by suggesting that perhaps it is a healthy sign. Of course, the same cannot be said about the declining US fertility rate (see Elon’s thoughts on this) which could be worse than hiking interest rates during an economic contraction.