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The Fed Just Issued A Dire Warning For The Stock Market


  • The Fed all but confirmed a V-shaped recovery will not happen.
  • Worse, the Fed projections suggest a long recovery path.
  • The Fed also shrank the size of it QE program very quietly.
  • Now we enter warning season.
  • Looking for a helping hand in the market? Members of Reading The Markets get exclusive ideas and guidance to navigate any climate. Get started today »

The Fed just gave a pretty gloomy outlook for the US economy, which suggests that the V shaped recovery hopes are pretty much dead, as I have tried to explain multiple times. A full recovery, when considering the output gap that is likely to be created, is likely to take a very long time, and the stock market is not priced for that.

The rise in the market was driven mostly by hope and optimism, with a tailwind provided by easy monetary accommodation. But the Fed just reduced its balance sheet program from basically unlimited to around $120 billion a month. But that announcement was not in the main FOMC statement or the press conference; it was in a press release issued by the New York Federal Reserve Bank. So it mostly went unnoticed.

The Fed now sees GDP contracting by 6.5% in 2020, growing by 5% in 2021 and 3.5% in 2022. That would get real GDP back to where the economy stood at the end of 2019, at about $19.5 million. However, the Fed projects a longer-run growth rate at 1.8%, which is down from 1.9% in December.

Output Gap

The bigger problem is the output gap, the difference between the potential GDP and real GDP, which explodes to around $1.5 trillion at the end of 2020, and gradually shrink to approximately $735 billion by the end of 2022. However, for the economy to return to its full potential, it would need to grow faster than the Fed's projection of 1.8% per year. Real GDP would need to increase by nearly 2.2% each year and would not reach its full potential until 2030.

Discounting Mechanism

Here is the big problem, does this extreme recession damage the long-run growth of the economy, and if it does, will that slow future earnings growth. In

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This article was written by

Mott Capital Management profile picture

I am Michael Kramer, the founder of Mott Capital Management and creator of Reading The Markets, an SA Marketplace service. I focus on long-only macro themes and trends, look for long-term thematic growth investments, and use options data to find unusual activity.

I use my over 25 years of experience as a buy-side trader, analyst, and portfolio manager, to explain the twists and turns of the stock market and where it may be heading next. Additionally, I use data from top vendors to formulate my analysis, including sell-side analyst estimates and research, newsfeeds, in-depth options data, and gamma levels. 

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Comments (377)

There is a major disconnect between Wall Street results and its gains primarily being from Fed infusions since October 2019 to the present day and what is happening on Main Street. The last Jobs report (U3) was understated by 10 million jobs and if you included unemployment in U4, U5 and U6 then unemployment would total somewhere around 50 million. With bars, restaurants and construction working at 50% future earnings will be non-existent. All will be declaring losses! At which point the current valuation of Wall Street (which is overstated by about 30%) will drop an additional 25% to around 50% of its current values. That is why 33% of investors have cashed out 100% of their investments between Feb and May as they see nothing but risk. US citizens must realize that all the funds being put into the market today will have to be repaid by the tax payers at which point I would suggest today that tax rates be computed against the entities that receive these funds proportionate to what is "lent" (i.e., 25% to Lower & Middle Income brackets and the remaining 75% be applied against wealthy investors and corporations receiving these funds).
The Fed should be disbanded. "Globalist vampires." - Alex Jones
BobinSea profile picture
We've already HAD a V shaped recovery in the stock market. What are you talking about?

It may finally falter here but it's a lot late to tell us that you were right all along. The NDX made a new yearly high. It came all the way back and then some.
What happened to all the toilet paper?
AEGISBMD profile picture
@Phil Dumfee

The FED is using it to print money.
peterinjapan profile picture
Excellent post, thank you. Greetings from rural Japan.
This market is too expensive, expat some tech companies.
Good data and commentary.
3up3down profile picture
An entity that pulls the strings on financial assets worth some $60 Trillion, and also has a large "say" in the future value of wages/earnings, seems to be panicky and a seat of the pants decision maker.
good arcticle....easy to understand and short to say: nowadays people are willing to pay let me say for an company an PE 22...they amplify todays earning by factor 22......or just to say give an credit of factor 22......well in advance....but the returns will not take 22 years....it might take 80 years......with an company of PE 1-4 its ok.....but PE22 or even higher is outragious......what if the earnings decline in future? YoY by only 10%?? this big knockout of the economy is not done in a few months....people will never act the same AFTER....
I find all these "will there be a second wave" comments amusing. There cannot be a second wave when the first wave never ended. Look at the US daily infection rates. Even accounting for more testing the figures are way too high. If the rate keeps simmering along like this through the summer then October onwards has the potential to get ugly. Its highly unlikely there will be any vacvine before early next year. I'm interested to see how the market handles a presidential election in the middle of this, many of the states election systems are held together with spit and glue. Has the potential to make Florida 2000 look mild.
Sundance Utah profile picture
Your immune system is the best vaccine. It is free and already working.
millions can't disagree with you because they're dead.
No. The only area of concern is Arizona. Mortality figuring continues to decline. It is rather pushing the capacity of ICU beds. The original and only valid health concern.


Now I am sure opening up is adding to spread. As did the protests. As did the massive rioting/looting/pillaging exploiting the civic action of good Americans.

All gains in herd immunity are valuable. Despite all the hysterical ink spilling on 50% then 70% being all or nothing. Self apparently deluded or disingenuous. All gains in herd immunity are a significant advantage. No that we know immunity has enough duration to be extremely beneficial.

But as we can all see - the hospitalization trend correlation to cases is dropping. Pretty much proving the case national and even statewide lock downs were wrong and pigheaded. That additional testing is improving our understanding of the true correlation. Which was wildly hyped.

It may become necessary in localized areas to take a step back on opening up. But it is pretty clear the communist plague is not a summer virus. So states were correct to take advantage of warmer weather to open up.

It was always about slowing the spread so as not to overwhelm the health system. Observation/ results establishes the states with braver Americans were correct and in degree lucky. But then fortune always has favored the brave. Americans are always Blessed with more than our fair share of brothers and sisters willing to take risk.

What is stunning is the strength of our economy. Given the leading Southern and Midwest states are still opening up. While New York and California continue to smash their economy and therefore citizens with political grandstanding. Worship science rather than practicing it.

The election likely is already decided. Progressives allow and even encourage out of control pillage, murder and destruction. Then followed up with defund the police?

Occupation of Seattle by violent ANTIFA/segregationists/assorted criminals is not a gay pride event. In fact the current 'leader' is a homophobic cretin. Gay Americans should be very upset. I bet they are but afraid to say so. Like so many of us.

Just like the drug infused OWS, rape is common and likely unreported. Young idealistic women do not understand the true nature of 'street action'.

Sadly it is not the college campus or their parents middle class neighborhood. But street action - oft sickly encourage and mentored by their radical profs. Their life shattering violation a 'regrettable' sacrifice for the cause.

Foundering Joe simply is not a viable alternative. Worse still he is likely to pick a radical social justice VP to placate the Bernie bros.

President Trump likely could be beat. But not by this theater of political absurdity or more properly insanity.

Most of us should likely just go low cost indexing. Like 97% of the pros. But those of us who like active investing must factor in politics. This is not the time of Art Laffer supporting Clinton's third way policy agenda.

It is a time of promising to block all new fracturing. While proclaiming intermittent is a solution as the failure is self apparent.......

It simply can not be ignored when your savings is on the line.
Actually the necessary decoupling with the dangerous communist regime oppressing the Chinese people likely will slow worldwide growth initially. By fall the highest probability is the communist plague is in the rear view mirror.

The almost unbelievable good news is American small business is still positive on the future. Our saving rate is through the roof. We Americans want out of the house. We want to take long driving trips. It is possible and we should all hope this is a V recovery. As improbable this outcome would have been in our past.

This was a consumer led small business explosion economy. This alone was enough for full employment and raising wages. While necessary trade adjustments will be a drag, we now know healthy small business is enough to pull us through the adjustment.

Also American fractures lowering the cost of energy and securing the stability of world markets - to the upside. Cheap energy is not the 100% economic benefit when we had to import it. But cheap energy does offset inflationary pressures likely to arise from trade adjustment.

But if we stop the Juan Williams voting zombie and their demands for completely failed to the point of danger intermittent delusions? American will maintain a very large competitive advantage due to discounted to world prices energy.
There is one big hole in the whole analysis, P/E can be anything there is no rule, P/E of 30 can be new normal, why - because of 0 interest across the world and TINA factor - "There is no alternative".
alternative?...lol buy something what is an real asset and is at multiple decade low compare to SP500)....thats an quiz
AEGISBMD profile picture
@Mike 007

@AEGISBMD ..silver is an good idea......just better deal...is platinum...for long term........sillver like to spikes rapidly in short terms.......but doesnt hold value too long.......in platinum there will be less coming online ...because of such low prices and limited locations.....mostly SA
12 Jun. 2020
Yeah a 40% correction sounds about right...
Solojif1 profile picture
Just buy the dip like the last 10 years.
Don't fight the Fed.
SmartStops profile picture
Good article! Another reason that one should always have a smart risk management approach to protect their portfolios. Many more ETFs out there to hedge with (Direxion even announced some on 6/11). Resource list compliling them as info is scattered all over the web on this subject (and investopedia even is behind the times) is at: invest.smartstops.net/...
We have come to a bad point where a company can make more money by being run bad. The Fed says we got your back! (bail out) So that tells the owners , lets just keep running the company bad and keep the fed printing money, The worse we perform the more money we make.Its been going on for ten years! .
I think the author is misreading the tea leaves. Check out the Fed’s Main Street lending program. Notice it is the Boston Fed branch handling instead of New York. My bet is this will be a massive program and the Fed doesn’t trust the New York Fed employees time be fair so they moved it to Boston. We will see
Fuck the FED....their irrelevant to our economy anymore. Trumps in control...
Illuminati Investments profile picture
The Fed IS our economy now.
bunker boy? bankrupt in every business he has run. now bankrupting America. Yes, he is in control of his followers. they all chant "yaba daba do"
Philipsonh profile picture
I turned on a financial network to see what they were saying yesterday. They touted a few of the very few stocks that were moving up, instead of discussing the strong down market. I turned off the TV.
GameBuzz profile picture
You're watching the wrong network, LOL. CNBC was all about the downturn. Like most, fear tends to get ratings. Would love to know which one you were watching.
This is how they get people to sell. People watch CNBC about how bad the market is, they get scared, sell. profit goes to wall street. Rinse, and repeat. Just hold on to your stocks if you bought it within the last 2 days. or even the past month or 2. With interest rate being zero. stocks are valuable.
NO disagree!
I was buy near the lows and sell it 5 days ago.....i will buy back any company with an forward PE <3 .....5 if i can find! IF not....too expensive!
DK-AUS profile picture
I couldn't get past the first point to read the rest of this article - "The Fed all but confirmed a V-shaped recovery will not happen." Well what does one call a 6.5% decline in GDP this year and a 5% increase next year - that seems pretty V shaped to me.
Illuminati Investments profile picture
Well, just remember they initially predicted 3% GDP growth for this year, so maybe we should apply +/-9% error bounds to that "5% increase".
DK-AUS profile picture
Not sure I get your point - without Covid and in an election year, we could have gone close to 3% GDP this year. What's your prediction for GDP next year?
DK-AUS profile picture
And also it was the author's premise that the Fed said there wasn't going to be a V shaped recovery, when they provided GDP estimates that suggest there will be a V shaped recovery (i.e. -6.5% this year, +5% next year).
daneedwards9 profile picture
Headed down bigly.
It's fiiineeee, just keep buying the dips /s,
yes...buy the lower dips and sell the lower tops= bearmarket
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