Let’s say you wanted to design a program to reduce inflation. Wouldn’t you do exactly what Federal Reserve Chairman Jerome Powell is doing? You would raise rates aggressively, and I defy you to say that it does more than that. You’d ignore positive numbers like the weak consumer price index printed last week by sending Chris Waller – one of the Fed’s most hawkish governors – over the weekend to say that interest rate hikes are far from over. You wouldn’t claim any wins, including the collapse of cryptocurrency exchange FTX, which filed for bankruptcy on Friday. You would simply be silent, allowing investors to expect another 75 basis point increase, especially if retail sales this week beat expectations.
There are many ways to measure a Fed chief. Most people who comment vehemently and viscerally against the Fed tend to be wealthy people who want their wealth preserved, but who somehow present themselves as altruists. Or people in the media consider them as such because they are popular reservations. This is probably why they are valued in the eyes of viewers.
The old me said, “What a bunch of selfish bastards.” The new me simply says, “I know where they come from, but they are misguided.
But let’s use this view as a litmus test. You must be wondering where are all the rich punishments? Maybe they realize Powell is tougher than they thought? I think so.
Their silence is stronger than their protests. Powell is the real deal and he’s not done until he loosens our economy, shrinks our wallets, reduces our purchasing power, lowers our wages and makes our products cheaper. The good news so far: it does all of that. The amazing news? It does not harm business profits in the process. They shine.
Consider: Last Thursday and Friday were back-to-back winners, which is very rare in this one-year bear market. If you bought at the market high on Thursday, you are still up. I can count on one hand how many times this has happened since the peak.
Could it be as important as many believe?
That’s a tough question, because for the Fed to tick all its boxes, Powell needs wages to stabilize and that hasn’t happened. He needs to see CPI weakness beyond the handful of things that softened things in last week’s reading. More importantly, he needs to see our purchasing power diminish, and we’re definitely not there yet.
But let me throw you a weird curveball. Speculation is an integral part of the reduction in purchasing power. Speculators spend too much because it is in their nature to borrow too much. So what do we do with the crypto crash? How much money is really lost in crypto? How big are the losses? I’m so sick of the absurdity of the Lehman moment (the collapse of Lehman Brothers in 2008 was the key moment in the 2008 subprime mortgage crisis). I don’t even like comparisons to the fall of Enron in 2001. As my late mother would say, comparisons are abhorrent – if she had lived longer, she might say irrelevant.
What matters is that financial cataclysms like the ruin of FTX CEO Sam Bankman-Fried cause people to reassess their wealth and spend less – and I’m not just talking about those who have actually lost and will lose. much more money in these often worthless cryptocurrencies.
Go 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 certainly feel punished, but if you’re mostly in FAANG/M, you feel broke.
Why is all this important? Because the Fed would ideally like to buy time while supply chains become more efficient, which we see with falling logistics costs. It would certainly help, though, if we slowed down spending as a nation. We need both more goods on the market and less goods sold. Any glut will lead to both lower prices and layoffs.
Does it matter if layoffs are largely concentrated in any tech, including fintech and real estate tech and retail tech?
At one point I thought these sectors were too small to make a difference. You would need massive layoffs in retail, auto, housing, etc. – everything except the insatiable health sector.
Now I’m not so sure. Maybe the Silicon Valley layoffs are having a bigger impact on the economy than we thought. Just as technology has become a bigger part of the S&P, it has also become a bigger part of the economy. Of course, it’s not nationwide, but tends to be concentrated only in Northern California and Seattle. But layoffs will be in tendrils that are not in these areas.
Anything that reduces the speed of spending, coupled with the reduction in the price of logistics, could lead to lower prices and wages, which should lead to slower and weaker rate increases. This is why the 2-year Treasury yield is having such 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 seemed important to me because they were actually based on weaker numbers that looked unassailable and yet, at the same time, did not portend earnings shortfalls.
Of course, it seems ridiculous that we could go through this whole process with giant revenue increases. But we’ve seen the hottest sectors of the economy – technology and the internet – turn out to be much more vulnerable than we thought. It’s amazing how much Metaplatforms (META), Alphabet (GOOGL) and even Amazon (AMZN) rely on advertising for revenue growth and it’s plummeting as retailers feel the pinch from the Fed. Microsoft (MSFT) felt the last of PC Armageddon. Advanced micro-systems (AMD) and Nvidia (NVDA) have been hit hard by the game’s undeniable weakness – even as game companies deny that weakness.
netflix (NFLX) is coming back, but it’s never been bigger. Apple (AAPL) hangs in there, even if it seems unsustainable. But you know my sentiment on Apple: own it, don’t trade it.
I’m not including the hundreds of other tech stocks that crashed. But if I did, the decline can only be considered seismic.
Which leads to a logical question: what if technology of all kinds and cryptography turn out to be more important than we think? What if they could cause the slowdown we need to keep the Fed at bay? Do we really need traditional companies to miss their numbers to see the end of the crunch? Perhaps the voracious spending from these hot sectors is cooling off as the logistical nightmare comes to an end. That might be enough to make us wonder if we’re further along in the process of breaking inflation than we thought.
As I consider what to say at Thursday’s monthly meeting, remember that we will have some truly amazing retail sales data to help resolve the dilemma. The best that can be said, however, is that the two days through the end of last week seem significant, especially in light of FTX’s collapse.
These two days seem to mean that the Fed is taking a break. Although I would say it’s a break of its own making.
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