SALTA, ARGENTINA – “Stocks Slide After Powell Testimony,” reads a headline at Bloomberg.

The Dow dropped 380 points yesterday, leaving February as the worst month in two years.

What did the new Fed chief say?

Only that he thought the economy was doing so well that the Fed would be able to continue raising rates and reducing its bond holdings. It is currently scheduled to get rid of nearly $2 trillion worth of bonds in its quantitative tightening program over the next two years.

Allergic to Higher Rates

As you'll recall from yesterday's Diary
, Fed policy is as easy as 1… 2… 3.

(1) It keeps rates too low for too long. (2) It raises them, causing a serious allergic reaction on Wall Street… which it then medicates (3) with more low rates.

It is now in the middle of Mistake 2. And our guess is that a recession/crash will happen before it has had a chance to restock the medicine cabinet.

Yes, Dear Reader, Wall Street is allergic to higher rates. Not only do they raise the discount rate, making the flow of earnings less valuable in today's money… they also signal that the Fed no longer has investors' backs.

And now, after so many years of the Fed favoring financial assets with EZ credit policies, the financial world is particularly sensitive. Even a small increase in rates could send Wall Street to the emergency room.

Which is okay with us. We don't care about higher rates. Or lower rates. We just want honest rates.

Because honest rates produce honest prices. And honest prices are what an economy needs to make the right decisions.

Honest Prices

Which merely raises the same question we asked yesterday.

How can some guys and gals with PhDs in economics know what the honest interest rate should be?

Even markets don't know.

They have to discover honest prices… minute by minute… based on all the information coming their way. Take away the information (from willing buyers and sellers, lenders and borrowers, bulls and bears) and you are lost.