Source: Esquire

Dumb and Dumber

Just when you thought media/pundit commentary on the market and the economy couldn’t get anymore inane and stupid, they surprise you by plumbing a new depth. This article from CNBC, “These charts show how Fed Chair Jerome Powell is the most important thing to the market now,” is a solid gold example. Of course, Chairman Powell is in part responsible for this belief with his statement yesterday, “We will act as appropriate to sustain the expansion.” That comment was all it took to reinforce the opinion of those believing in a phantom ‘third mandate’ for the Fed … keep the economy growing at all times (i.e. no slowdowns, no recessions or, even worse, no depressions)… A brave new world of pre-emptive (Fed Strikes) rate hikes. Unfortunately (or fortunately) there is no third mandate. The mandate’s two main objectives are stable prices and maximum sustainable employment. All else being equal, the Fed will sacrifice employment if inflation rears its ugly head.

But, you say, inflation hasn’t reared its ugly head for years. That is true but the Fed does not want to do anything that might trigger that process … things like printing more money or keeping rates so low as to encourage speculation and bubbles. By the way, money printing and low rates have been the hallmarks of Fed policy for most of the past decade following the financial crisis. Fiscal policy, including our most recent tax cuts and the additional deficits incurred because them, are very expansionary (again, potentially inflationary).

Specifically, as it pertains to rate cuts, our president has done a yeoman’s job in cutting rates with no help from the Fed. Trade and tariff issues with China and Mexico have driven the yield on the US Treasury 10-year note to nearly a two-year low (down over 1% –3.24% down to 2.12% as of this post since last November). That 10-year is the benchmark used to set mortgage rates, very important for housing.

Fed policy and rates are not the problem. As such I believe it is dumb to think Jerome Powell can save us from the economic and stock market impact of trade policy/immigration policy by tweet. It is even dumber for anyone to proclaim that the Fed Chairman is “the most important thing to the market now.”

Having it both ways

Federal Reserve bank
of the United States

Back in November of last year there was a major hue and cry that the Fed had been too aggressive. they were going to kill the economy … drive us into a recession. The market collapsed running up to what I termed ‘the Christmas Eve massacre’ (a nine-trading-day decline of 10% in the Dow Jones Industrials, 3% of which occurred on Christmas Eve). Powell stemmed the bearish tide by reiterating the long-held Fed tenet of being ‘data dependent’ which, frankly, was not new news. Fast forward to the last thirty days and two Trump trade pronouncements … ‘China backed out’ of the trade deal that he had hyped as almost a fait accompli and Mexico … help at the border or new, progressively higher tariffs on everything you ship to the US. These two moves rightly spooked the market and sparked a flight to safety that took the yield on the 10-year from 2.48% to below 2.10% … in my opinion a de facto Fed rate cut. One would have thought that the read from the street would have been positive. It was not. The message was you need to be cautious. The 2.1% Treasury is a sign of potential economic troubles ahead. Now, even more ridiculous in light of this recent substantial drop in rates, there are calls for the Fed to take rates even lower. Higher rates are bad. Lower rates are bad. Evidently the bears have it both ways. Give me a break!

My take is pick your pundit, dumb or dumber, a rate cut by the Fed (bowing to pressure from the president and the talking heads) at this time would spook the market even more.  The narrative would become that the Fed sees something really bad out there (something that is not currently showing up in current economic statistics). SELL!

Reflect a moment. If you were the owner of a successful business, would you ever consider selling that business based on any of the above listed concerns? My guess is your answer will be “NO.” So, if you owned the stock of a successful company, when you think about it, why would you sell based on the same set of fundamentals? Most rational people would answer “NO.” Now, if you were a computer and your algorithms were designed to sell on words or phrases like “higher rates,” “new tariffs” or  “trade war,” you have no choice. Maybe that explains some of the craziness.

What’s your take?