Sure, China can hurt our markets. Yes, oil is going so low it's causing stress in the credit markets. It is true that the earnings this week are just OK. But don't kid yourself about what this selloff is really about. It's about a recession -- yep, the potential for a recession -- and what that will mean for corporate profits.
Ever since the Fed started tightening, we have seen a remarkable confluence of negative effects: a spike in the dollar, a slowdown in consumer spending, a breakdown in the Chinese stock market and horrendous action in the high-yield bond markets.
Now, not all of these can be ascribed to the Fed. That would be ridiculous. But what the Fed does or doesn't do creates the backdrop with which we must play. And the backdrop has gotten so much more negative since that December vote to raise rates that not seeing some cause and effect is to lie to yourself, and many people are doing just that.
I have told you that ever since the Fed tightened, we had to change our posture and get more defensive. That's because I have been taught by the late Marty Zweig -- one of the great wise men of all time -- that you should not fight the Fed and you should not fight the tape. You are fighting the Fed when Fed officials like Bill Dudley come out and are pretty positive about both the economy and the need for more tightening despite a totally obvious slowdown by any metric: industrial production, consumer spending, industrial capacity, the various Fed reports and, of course, any industrial earnings. Fed uber hawk James Bullard in a speech yesterday acknowledged that consumer spending peaked mid-2015 despite the continued decline in the price of oil.
Plus, once the fight with the Fed started, we became fighters of the tape, too. We used to say at my hedge fund that, at times, the market just wants to go down. That's when you know you are fighting the tape. Sure, you can get very big oversold bounces. But you don't get on terra firma until stocks hit levels where it seems absurd to sell.
In all the other downturns since the Great Recession, the Fed had our backs. It didn't want to hurt a recovery. But the Fed felt it couldn't wait any longer in December for whatever reason. Even though all numbers were pointing down except autos -- and now they have started to decline too -- they felt they had to act. They just thought too much time had gone by and they would create an inflation conflagration.
Of course, the opposite has happened and inflation expectations have sunk much lower. But the Fed chatterers won't rein themselves in and unless Fed chief Janet Yellen comes out and very specifically says the following: "We will do nothing more unless we see some pick-up in business or pick-up inflation," then we will remain tape fighters.
If you want a first-hand experience of what it means to fight the Fed vs. being at peace with it, you have to go back to 1998 in Confessions of a Street Addict, when I had haplessly bought stock right into a tightening Fed and then had to spit it out to save my firm. In the midst of the selling, the Fed realized the error of its ways and called an emergency meeting to stop the tightening because it was going to cause a recession, and it tacked to an easing. The market rallied and never looked back for years.
That's not happening now. You are fighting the Fed big-time, and if the Fed isn't careful, 2016 will mark a return to recession. That's the over-arching reason for this selloff, especially in a world starved for growth, and if Yellen and company aren't careful, that's just what we will get.