This week’s drama in the financial markets will be one for the history books.
For starters, the combined valuation of the U.S. stock market has never been higher — not in the Roaring ’20s, not in the dot-com bubble, not in the meme stock mania.
We are now at levels that surpass both 1929 and 2000.
And just as the tower of cards wobbles on the table, Jerome Powell has decided to shuffle the deck.
On Friday, Fed Chair Powell signaled that the balance of risks had “shifted.” Or in more crass terms, he “caved”:
Inflation may still be running hot, but the bigger fear now is unemployment.
In his words, the labor market is “unusually balanced” — meaning both supply and demand have slowed, and the downside risk to jobs could hit fast.
That’s the polite way of saying layoffs are already showing up in the data.
So, Powell has caved.
He’s all but confirmed a rate cut for September 17. Not because inflation is back at the Fed’s 2% target (it isn’t). However, 258,000 jobs just vanished from the books after the BLS revised its spring reports. Year-to-date, the revisions total 461,000 — roughly the population of Scottsdale, Arizona.
The labor market is cracking. AI surely plays a role. Tariffs, too. The suspension of small package shipping by DHL, FedEx and other carriers over new de minimis regulations from Europe and elsewhere isn’t going to help.
Bad timing: The Bureau of Labor Statistics is systematically losing credibility as a source of accurate employment data.
(Source: BLS, Bloomberg.)
So here’s the irony: the Fed is preparing to cut into inflation.
Core CPI is above 3%. July Producer prices, posted on August 14, reveal their most significant monthly jump since 2022. That’s 53 straight months of inflation above 2%.
And the market loves it.
The Fed’s Mandate — Now Tilted
The Fed has always had a “dual mandate”: price stability and maximum employment.
Since 2021, Powell & Co. has leaned heavily on fighting inflation.
Now, with Trump breathing down his neck (and already musing aloud about naming Powell’s successor “fairly soon”), the Fed has pivoted. Employment trumps inflation.
This is no slight shift.
It’s confirmation that rate cuts are coming — not because inflation is solved, but because political and labor pressures are mounting. Powell’s term ends in eight months. His successor, chosen by Trump, will be under orders to cut deeper.
What History Tells Us
Markets have seen this setup before. When the Fed cuts rates within 2% of market highs, the S&P 500 almost always rallies.
In fact, the S&P gained an average of 13.9% over the next 12 months in 20 of the last 20 times this happened.
That’s why we are calling this the “most terrifying bull market in history.”
Stocks, real estate, even crypto — all benefit when the Fed feeds liquidity into a hot market. Look at the scoreboard:
- Bitcoin: up 450% in under three years
- Gold: up 105% in the same period
During a crack-up boom, these are more than defensive assets. They’re leading indicators. The market knows inflation is here to stay. And asset owners are trying to beat it.
Echoes of the 1970s
The last time the Fed cut rates into rising inflation was in the 1970s — a decade remembered for oil shocks, double-digit CPI, and Volcker’s eventual 20% rates.
An overlay of the Fed’s current bout with inflation and the pattern established in the 1970s (source: Kobeissi Letter)
It’s too early for us to call a repeat of 15% inflation, but the dynamic is eerily similar. Stimulating demand when prices are already elevated only makes them hotter.
Meanwhile, the government spends nearly $600 billion a month, and the annual interest payments on its existing debt are now at $1.2 trillion.
The White House chants “make the foreigners pay” with tariffs, but the math says otherwise: by October, businesses will have passed most of those costs onto consumers.
It’s no wonder consumer sentiment is scraping crisis lows.
Why Bulls Outlast Bears
It’s counterintuitive, we admit.
But if you own assets, you’re in the club.
The wealth gap widens because wages never catch up to asset inflation. For the uninvested, this is painful. For asset holders, it’s a party.
Bull and bear market lengths since the modern era began following the cessation of hostilities in World War II and the beginning of the Bretton Woods global reserve status for the U.S. dollar. (Source: Charlie Billelo).
History is clear: bull markets last about five times longer than bear markets.
- Bulls: +254% over five years
- Bears: –31% over one year
Compounding builds wealth. Interrupting it destroys it. And right now, Powell is signaling that the music isn’t about to stop — at least not yet.
Asset owners will party like it’s 2021.
Can we still see a massive correction in AI tech leaders on the S&P 500 with all this going on? Absolutely. That’s what makes this a historic market. And a most terrifying one at that.
The question remains: Will the bond vigilantes crash the dance by demanding higher yields on Uncle Sam’s ballooning debt?
Until then, we’ll need to be prepared. “We’ve been a fan of cash, but if aggressive interest rate cuts are about to happen, long-dated bonds could see their prices soar in the coming months,” notes our Portfolio Director Andrew Packer. “Not to mention the fact that a rising global M2 money supply remains the most bullish for gold.”
~ Addison
P.S.: We’ll dig deeper into this at Grey Swan Live! this Thursday.
Our friend Andrew Zatlin, who Bloomberg has rated as the #1 labor market analyst for the past several years, has been warning about labor market “cracks” long before Powell admitted them.
And not just because of the headline-grabbing revisions by the BLS.
Zat’s view: revisions and layoffs are just the first tremors.
What happens when the quake hits? Join us — you’ll want to hear it. Zatlin will go into how he’s become the #1 labor market analyst – and all the data, both domestic and international – that can give you better insight into what’s really happening in the global economy.
Your thoughts? Please send them here: addison@greyswanfraternity.com
