text: Good morning. Here’s your Early Warning for Thursday, 22 September 2022.TODAY’S BRIEFING:READ TIME: 15 mins 08 secondsInFocus: Weekly Economic OutlookInside the BeltwayDomestic INTSUMGeostrategic INTSUMLow-Intensity Conflict Activity Rollup & OutlookInFocus: Weekly Economic OutlookFederal Reserve Chairman Jerome Powell confirmed a couple of my key assumptions in yesterday’s Federal Open Market Committee (FOMC) speech. First, he laid out a case for more pain and a dark winter as he pledged to continue hiking interest rates into next year. The Fed now projects unemployment to tick up through 2024 and for the U.S. economy to run sub-2% annual growth through 2025. This is surely a best case scenario, as Powell admitted yesterday that “a soft landing is very challenging” and that those slim chances diminish if the Fed needs to be more restrictive, which they probably will be. Powell said that Fed policy today is at the “very lowest” level of restrictive interest rates, signaling it gets more restrictive from here. The risk remains that the Fed’s tightening can only do so much to push down inflation because the strongest inflationary pressure is structural – disrupted supply chains and labor shortages are pushing prices higher. The Fed is not in a position to fix this, especially not on the cusp of deglobalization which will drive higher capital expenditure to move supply chains back to the Western hemisphere or to friendly nations overseas. (I do agree with Peter Zeihan in his book The End of the World is Just the Beginning that the era of “cheaper, better, faster” is over and that long-term demographics will eventually cause a global economic collapse. I doubt we’re there yet.)As always, we’re getting the rosiest picture imaginable from the Fed. Powell and Fed officials are managing expectations and trying not to cause unnecessary damage with their remarks. For instance, Powell said yesterday that he didn’t know what the chances of recession are, as if he doesn’t already know. It says to me that a recession is baked in.The second key assumption that Powell confirmed is the long expected correction in the housing market. As I wrote last week (and to be fair, since earlier this year):“[Combating inflation] also means undercutting the housing market. My key assumption is until we see a sustained reversal in home prices, we’re unlikely to see inflation come down significantly… My guess is that Powell uses the rest of this year to kill the ‘wealth effect’. We’ll likely see another major leg down in the markets. I’m expecting home prices in most markets to see a substantial decline. I think recession fears will kick into overdrive as we get closer to 2023.”Powell said as much yesterday: “We’ve probably in the housing market got to go through a correction to get back” to “reasonable” prices. Powell went on to say that home prices and rent would remain elevated. “Shelter inflation is going to remain high for some time. Hope for the best, plan for the worst,” he said. These are not exactly words of encouragement, especially when they come from the man whose job it is to ensure stable prices and maximum employment. To recap, we don’t have stable prices, and Powell is about to wreck maximum employment.The ChartsOver in Treasuries, we see continuing signs that a recession will occur. Note that the last time Treasury spreads were this bad, the year was 2006, just before the Great Financial Crisis. This is not a prediction that we will have another financial crisis, but it’s on the table.A look at the Buffet Indicator shows that markets are still overpriced, and I do expect another leg down from here. I shared this chart back in February and explained why markets were headed down from there. The S&P is down roughly 16% since then. Note the last two times the yellow line (Wilshire total market cap) rose above the white line (GDP trend line) was the 2000 bubble and the 2007 bubble. This is a painful chart to look at.