Suppose you wanted to design a program to reduce inflation. Aren’t you doing exactly what Federal Reserve Chairman Jerome Powell does? You were going to raise interest rates aggressively, and I dare you to say that he just doesn’t. You may ignore positive numbers like last week’s weak CPI reading by sending Chris Waller – one of the Fed’s more hawkish governors – last weekend to say rate hikes are not over yet. It will not claim any victories at all, including the collapse of the crypto exchange FTX, which filed for bankruptcy on Friday. It will remain muted, allowing investors to expect another 75 basis point increase, especially if this week’s retail sales come in above expectations.
There are many ways to measure the head of the Federal Reserve. Most of the people who comment loudly and strongly against the Fed tend to be wealthy people who want to preserve their wealth, but somehow they are actually altruistic. Or that people in the media regard them as such because they are valuable reservations. Perhaps this is the reason for their respect in the eyes of viewers.
I was saying, “What a bunch of selfish bastards.” The new I simply says, “I know where they come from, but they are unwise.”
But let us use this point of view as a critical test. You have to wonder where all the rich attackers are? Perhaps they realized that Powell was tougher than they thought? I think so.
Their silence is louder than their protests. Powell is the real deal and he’s not done until he eases our economy, shrinks our wallets, lowers our purchasing power, lowers our wages, and makes our merchandise cheaper. The good news so far: It does it all. The great news? It does no harm to corporate profits in the process. It is bright.
Keep in mind: last Thursday and Friday had two consecutive winners, which is very rare in a bear market this year. If you bought at the highest market price on Thursday, you are still high. I can count the number of times this has happened since the climax.
Could it be as important as many think?
That’s a tough question, because in order for the Fed to check all of its funds, Powell needs to adjust wages and that didn’t happen. He needs to see weakness in the CPI beyond the few items that eased things up in last week’s reading. More importantly, he needs to see our purchasing power dwindle, and we’re definitely not there yet.
But let me throw you a weird curveball. An integral part of reducing purchasing power is speculation. Speculators overspend because it is their nature to borrow too much. What, then, do we take away from the cryptocurrency crash? How Much Money Is It Really Wasted In Crypto? How big are the losses? I’m so sick of the bullshit of the Lehman Brothers moment (the collapse of Lehman Brothers in 2008 was the defining moment of the 2008 subprime mortgage crisis). I don’t even like comparisons to the fall of Enron in 2001. As my late mother says, comparisons are repugnant – had she lived longer, you might say they’re irrelevant.
What matters is that financial disasters like the destruction of FTX CEO Sam Bankman-Fried cause people to revalue wealth and spend less – and I don’t just mean those who have already and will lose a lot of money in these often worthless cryptocurrencies.
Take it a step further: Another unknown is the amount of money invested in FAANG/M (Facebook, Apple, Amazon, Netflix, Google, Microsoft). If you’re in the S&P 500, you definitely feel punished, but if you’re mostly in the FAANG/M, you feel broke.
Why is all this important? Because the Fed would ideally like to stall for a while while supply chains become more efficient, something we’re seeing as logistics costs drop. However, it would certainly pay off if we slowed spending as a nation. We need more goods to reach the market and fewer goods to be sold. Any glut will cause lower prices and layoffs.
Does it matter if layoffs are largely concentrated in anything technological, including fintech, real estate technology, and retail technology?
I once thought these sectors were too small to make a difference. You’ll need mass layoffs in retail, auto, housing, you name it — all but the insatiable health sector.
Now I’m not sure. The layoffs in Silicon Valley may have more impact on the economy than we thought. Just as technology has become a larger part of S&P, it has also become a larger part of the economy. It’s certainly not nationwide, but it tends to be concentrated only in Northern California and Seattle. But the layoffs will be in the tendencies that are not in those areas.
Anything that reduces the speed of spending, coupled with lower prices for logistics, can cause prices and wages to fall — causing interest rates to rise slower and smaller. This is why the 2-year Treasury bond yield is having a hard time staying above 4.5%.
I don’t want to say we’re out of the woods when Fed officials say we’re in the woods. I want to say that Thursday and Friday felt very important to me because they were actually based on softer numbers that seemed unrecoverable, however, at the same time, did not portend a shortfall in earnings.
Sure, it seems silly that we can get through this whole process with giant profits ballooning. But we’ve seen the hottest sectors of the economy – technology and the internet – reveal that they are far more vulnerable than we thought. It’s amazing how much meta pads (dead), the alphabet (GOOGL) up Amazon (AMZN) is relying on advertising for its revenue growth, and this is in a state of collapse as retailers feel the Fed’s tightness. Microsoft (MSFT) I felt the last of what happened at Armageddon. Advanced Micro Devices (AMD) and nvidia (NVDA) has been rattled by the undeniable weakness in gaming – even as game companies deny this weakness.
Netflix (NFLX) is back, but it’s never been this big. apple (AAPL) is hanging there, even if it is impossible to continue. But you know my feelings on Apple: Own it, don’t trade it.
I am not including the hundreds of other tech stocks that have collapsed. But if it does, the retreat can only be considered seismic.
Which leads us to a logical question: What if technology of all kinds and cryptocurrencies turned out to be bigger than we think? What if they cause the slowdown we need to keep the Fed at bay? Do we really need legacy carriers to miss their numbers to see the tightening end? Perhaps the voracious spending that came from these hot sectors will subside while the logistical nightmare is over. That may be enough to make us wonder if we’ve come a long way in the process of breaking inflation than we thought.
As I think about what I’m going to say at the monthly meeting on Thursday, remember that we’re going to have some really amazing retail sales data to help resolve this stalemate. The best that can be said, though, is that the two days ending in the past week look significant — especially in light of the collapse of FTX.
These two days seem to be saying that the Fed is on a breather. Although I would say it’s a break in the making.
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