Powell Wants You to Lose Your Job (EP.276)

Episode Summary

Executive Summary: The episode centers on the Fed’s aggressive anti-inflation stance, with the hosts arguing Jerome Powell is risking unnecessary recession, labor-market pain, and housing damage after markets have already repriced sharply. They discuss bear-market dynamics, bond and stock losses, rising mortgage rates, inflation data, and why the long-term outlook may improve even as near-term conditions worsen.

Main Topics: The Fed’s hawkish pivot and recession risk (Priority: 5/5): The hosts argue Powell is overcorrecting for the 'transitory inflation' mistake by pushing too hard against inflation, even if it means higher unemployment, broken markets, and weaker wages. Housing market stress from surging mortgage rates (Priority: 5/5): They repeatedly emphasize that 7%+ mortgage rates make affordability math break down, potentially freezing housing activity and causing years of reverberations across the economy. Market drawdowns, bear-market rallies, and sentiment (Priority: 4/5): The discussion revisits the unusual market reversal: a prior bear-market rally made back more than half the losses before making new lows, while broad bearish sentiment remains elevated. Inflation mechanics and why supply-chain excuses are fading (Priority: 4/5): They cite charts showing inflation is broad-based, rents are still likely to lag higher in official data, and imports suggest demand was a major driver of inflation, not just supply disruptions. Bonds, cash yields, and long-term portfolio implications (Priority: 4/5): Despite steep bond losses, the hosts argue higher yields improve long-term expected returns, especially for savers, retirees, and target-date investors who can now earn meaningful income again. Media, entertainment, and lifestyle recommendations (Priority: 2/5): The latter part of the episode shifts to TV/movie recommendations (Industry, Margin Call, Chinatown, Vengeance, The Raid, House of the Dragon) and a sponsored discussion of Tropical Bros shirts.

Key Arguments: Powell/Fed are prioritizing inflation reduction at the cost of jobs and housing, which the hosts see as excessive and potentially reckless. The Fed has already caused major tightening in stocks, bonds, commodities, and housing, so a pause would be more prudent than continuing to hike aggressively. A 7%+ mortgage rate combined with record home prices likely means the housing market must fall materially to restore affordability. Inflation is not just a supply-chain story; broad measures and import trends suggest demand pressure played a major role. Long-term investors can benefit from this pain because higher yields on cash and bonds improve expected returns. The current setup may lead to a future Fed reversal or rate cuts, but only after material economic deterioration. Bearish sentiment is elevated, which is often constructive for long horizons, even if it does not help short-term market timing.

Data Points: Current bear-market drawdown: 23.8% - The S&P 500’s largest drawdown in the cycle as discussed early in the episode June low comparison: Took out the June lows by a smidge - New bear-market low after the recent selloff Mortgage rates: About 7% - Cited as a level that likely breaks housing affordability math Average credit union mortgage quote: 7.46% - Lake Michigan Credit Union quote shared by a listener Fed unemployment projection (Sept. 2020 forecast for 2023): 4.0% - The Fed’s earlier forecast for the unemployment rate Actual unemployment recovery timing: Back under 4% by December 2021 - They note the Fed’s forecast was off by a wide margin Fed funds projection (June 2021 forecast for 2023): 0.6% - The Fed’s own forecast for its policy rate Fed funds rate after two 75 bps hikes: 3.25% - They note the actual rate already exceeded prior forecasts Potential additional hikes discussed: Two more 75 bps hikes - The Fed’s then-current projected path for the rest of the year 30-year mortgage rate and affordability: 7%+ makes the math not work - Used repeatedly to argue housing is at risk of freezing TLT drawdown: -37.5% from high - Long-duration Treasury ETF performance Zero-coupon bonds trailing 12 months through March 2020: +65% - Referenced as the prior meme-like rally before the current collapse U.S. dollar year-over-year move: At a level associated with financial stress - Morgan Stanley chart cited with prior crises Chipotle steak surcharge example: $5 premium / $19 total - Used to illustrate inflation and higher menu prices Airbnb cleaning fee average: $143 - Average cleaning fee across U.S. properties as of June 30 Airbnb cleaning-fee increase over five years: +44% - Shows rising ancillary costs in travel Starter homes share of new single-family homes: 8% - Homes 1,400 sq. ft. or less today Starter homes share in the 1940s: Nearly 70% - Historical comparison from the New York Times piece Low-credit-score mortgage originations share in 2007: 26% - Mortgage originations below 660 FICO at the peak before the financial crisis Low-credit-score mortgage originations share today: 5% - Used to show underwriting is much tighter than in 2007 Tech IPOs in 2021: 110 IPOs raising $73 billion - Illustrates the collapse in issuance in 2022 Tech IPOs in 2022: 1 - A dramatic drop in IPO activity S&P 500 performance since end of 2019: Up about 18% - Mentioned as a price-basis comparison after the pandemic rally Average target-date fund performance year-to-date: Poor across vintages - The hosts describe widespread pain in retirement funds

Pivotal Quotes: "We could take the stairs to the bottom. It might take a while, but we'll do it. Instead, the Fed is just pushing you off of a cliff for the US economy." — Ben Carlson: Critique of the Fed's refusal to pause rate hikes despite broad market and economic weakness "I think if you break the housing market, you break the US economy." — Ben Carlson: Why mortgage rates near 7%-8% are viewed as the key danger zone "The Fed has changed their mind a million times in the last three years." — Michael Batnick: Pointing to the Fed’s poor forecasting record and shifting priorities

Implications: Near-term pain may intensify for housing, rates, and employment, but higher yields and bearish sentiment could create better long-term entry points for savers and investors. The key risk is the Fed overshoots and forces a deeper recession before reversing.