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The Fed’s Hellbent Effort To Destroy The U.S. Economy

May 6, 2022

A day after the Federal Reserve Bank drove a rusty spear into the heart of a supply-anemic, barely beating U.S. economy (GDP contracted 1.4% in the first quarter of this year), stocks dove head first into the next major decline. A day after the Fed and its profiteering surrogates artificially and predictably goosed the stock market to camouflage the next Great Recession that they are hellbent on starting, stock market investors pointed a Ted Williams cigar in the air and said, “We are not as stupid as you look.”

As this commentary is going out late in the day Thursday, May 5th, the Dow Industrials, S&P 500, NASDAQ 100, and Russell 2000 have wiped out the artificial gains from a day earlier, and then some. Industrials are down 1,282, S&P down 185, NDX down 806, and RUT is down 90. This is a rational response to the most powerful financial institution in the world announcing they are about to destroy the U.S. economy in a misguided attempt to correct their missteps over the past two years that have caused the worst economic rise in inflation in 40 years. This is one dangerously run Federal Reserve Bank, lacking common sense, finesse, and as a matter of fact, have no clue about what the problems are.

On Wedneday, May 4th, the Fed not only announced they are raising interest rates by the highest amount since 2000, 22 years ago, but they also announced that they are going to continue to do so, while they also pull $47.5 Billion of money out of the economy in each of the next three months, starting in June. They said that this amount would rise to $95 Billion per month thereafter. This is a massively aggressive Quantitative Tightening that the Fed is starting. They will do this by selling, or letting mature, securities they hold in their $9.0 trillion historically outlier balance sheet.

Here is what we wrote in our Wednesday night Market Newsletter to subscribers about that day’s afternoon mega-rally:

The Fed and their surrogates goosed the stock market aggressively Wednesday, as we expected, to camouflage the damage their plan is about to do to the economy, and also to the stock market. The explosive rally we saw Wednesday, after their announcement and press conference, is temporary. It is a large chunk of corrective wave 2-up. There is nothing Bullish about what the Fed just did, or plans to do. It is contractionary policy pure and simple. The stock market rally off that news is deception.”

The Fed is aiming to solve hyperinflation, by retarding aggregate demand, to decrease it to the shrinking levels of aggregate supply. Its strategy is to take money from the economy so that it cannot be spent to purchase goods and services. This effort will cause economic decline. What is needed to tackle this inflation problem is to boost supply, the supply of labor, goods and services. The Fed’s tactics fail to address this key cause of hyperinflation. They are working the wrong side of the price equilibrium equation.

The Fed has clearly decided they need a stock market crash, one that lasts a while, in order to take stock portfolio wealth out of the economy, to take money from the pockets of households, to shut down spending. That strategy does nothing to increase supply shortages, which is the core problem. In fact, it takes away the incentive to produce more supply of goods, and takes away the supply of jobs. It is an insane, even evil, approach to macroeconomics in the U.S.

This dual attack is aimed at curtailing aggregate demand for goods and services, to shrink the GDP pie down to the size of shrinking aggregate supply. This spells Great Recession. In an ideal world, supply would increase to the level of demand, but the Fed does not have the tools to accomplish this, as we witnessed over the past two years when the Fed pumped $7 trillion into the economy out of thin air. Shortages happened regardless.

Economic prosperity requires growing aggregate supply equal to growing aggregate demand, or growing aggregate demand to equal larger aggregate supply. That keeps inflation at bay, supports a rising stock market, and improves wealth prospects for households. That generates greater GDP, and greater tax revenues without the need to raise tax rates. The key is to have rising aggregate supply. The opposite is occurring now, with no easy solutions in sight. Shrinking aggregate supply is the problem.

So where is the stock market headed?

The S&P 500 is now falling in a Bear Market from their January 5th, 2022 top. That top was the conclusion of two major long-term Bearish patterns. Above we see the S&P 500 has completed a Long-Term Rising Bearish Wedge from 1986, overlapped contemporaneously by a Jaws of Death pattern from 1986. This is the start of Grand Supercycle degree wave {IV} down. The downside price target is substantially below current levels.

In the next chart, we show the Elliott Wave mapping from the January 5th top. There was a five-wave impulsive decline that ended February 24th, 2022, labeled wave i-down. From that low, the S&P 500 rose in an a-up, b-down, c-up corrective partial retracement of i-down, labeled wave ii-up, which topped on March 30th. From that top, the S&P 500 fell in an impulsive decline that bottomed intraday, May 2nd, 2022, labeled Micro degree 1 down of larger degree iii-down. The bounce from the May 2nd bottom through the Fed’s manufactured rally on May 4th, is labeled wave 2-up of iii-down.

The bounce from the May 2nd bottom through the Fed’s manufactured rally on May 4th, is labeled wave 2-up of iii-down. This top looks to be complete, which means the plunge Thursday, May 5th is the start of a powerful wave 3-down of iii-down. Prices are headed lower.

We show a close-up of the decline from March 30th in the next chart. There are ways to save money, and even make money as the stock market declines. There are strategies that run the gamut from moving to cash, to dollar cost average purchasing into the decline (although, that can be like trying to catch a falling knife if the decline is deep and persistent). Other strategies include investing in inverse ETF or ETNs, or Put Options on the major stock indices. We explore these choices in our Conservative Portfolio model, and our Silver ETF and Platinum Options Trading programs at www.technicalindicatorindex.com .

At Dr. McHugh’s www.technicalindicatorindex.com we track the short-term waves that make up these larger degree trends, and chart them in our forecast newsletters, and have developed several proprietary Buy/Sell indicators that help us identify when the next significant move is starting for the major stock indices, as well as for Gold, Silver and Mining stocks, and in which direction the move will develop. We publish these indicators in every Newsletter to subscribers. We offer education on how to trade markets up or down, based upon these indicators, patterns, and the overbought / oversold conditions that they identify with our Platinum Options and Silver ETF Trading programs. Our Memberships also include a Conservative Portfolio model.

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