In Volume 63 I mentioned an interview that Fed chairman Jerome Powell did last week with 60 minutes. Clearly it was prerecorded, and quite frankly it seems so robotic and mechanical that it comes off as the softball questions being given to the chairman before hand, and his responses were read from a script. Not only does it seem so overtly scripted, but I have to wonder why the Fed is coming out to give an interview to trumpet how great the economy is in the midst of changing policy direction, especially right before the next announcement which doubled and tripled down on the new direction the Fed is moving its policy of currency debasement. If the economy was so great then the change in the direction of policy would not be needed, and neither would this interview to try to convince millions of Americans.
In the prior volume I took exception with what he said about the auto industry in that interview. Here I’d like to have a look at some of the other things he said.
Right out the gate, the first question was “Have you stopped raising rates?” This is actually the single most important question regarding every single transaction you make. Regardless if you realize it or not, the interest rate, which is the cost of money, is built into the price of everything you buy. Even if you don’t borrow or use a credit card, somewhere along the way, someone borrowed money to get that product to your hands, which means their cost of borrowing is built into the price you paid at the cash register.
Regardless, Mr. Powell answered:
We see the economy as in a good place. We think that the outlook is a favorable one. Inflation is muted and our policy rate we think is in an appropriate place. So what we've said is that we would be patient as we watch to see how global economic conditions evolve and how our own economy evolves.
It’s a very general statement. So let’s see one sentence at a time…the economy in a good place. Well, yeah, it’s good, but it’s not great. Great would be GDP (total economic activity) of 3-4% growth for several quarters in a row. Since the Great Recession we’ve had several quarters above 3%, but not two or more quarters in a row. Lone exception to that was 2Q18 just over 4% and 3Q18 just above 3%, but 4Q18 was about 2.5%, and the forecasts from the major institutions as well as the Fed itself is to be below 1% for the first quarter this year. In fact the Atlanta Fed is forecasting just 0.4% for the current quarter. Clearly the economy is moving in the wrong direction, quickly deteriorating towards recession territory.
Next he said the outlook is favorable. Well, like I just said the Fed itself says growth expectations are anemically 0.4%. I wouldn’t call that favorable, unless what he means by it is that we’ll finally see a recession that will correct all the bad investments that the Fed caused over the last 10 years.
Inflation is muted was the next thing he said. So let’s make sure we’re all on the same page here regarding inflation. Inflating the price of the assets I own is a good thing because that will generally increase my standard of living. But the Fed is not referring to that. The Fed is referring to price inflation in the cost of living. Muted inflation would be 0%, or even negative (deflation). If that would be the case, my cost of living would not be rising and maybe even going down. But any time inflation is above zero, that means my cost of living is going up, and according to Mr. Powell’s Fed, wages are not rising as fast as the cost of living. Doesn’t sound too good to me.
Next he said the policy rate is in an appropriate place. Now this is a pretty controversial statement because the appropriate rate for a strong economy is more than double what it is now. Right now it is targeted at 2.25%-2.50%, and sitting at 2.40%, but a strong economy should see over 4.8% which is the long term average. I’d willing to bet that if we could do a real study on that, we’d find that the average is actually higher if not for the last 10 years of at or near 0% interest rate policy. So it seems that the policy is not appropriate for what he is claiming the economy is doing. It would be much more appropriate if the economy was teetering on the brink of recession.
Finally he said that the Fed will remain patient and watch the US and global economy. Again, if the economy here in the US is so good, what is he watching for? He should be able to continue to raise rates to a much more normal level without having a noticeable impact on the economy. And what about the rest of the world? He is responsible for America only. The rest of the world will have an impact on the US as well, but for different reasons than he is implying. As the US economy falters, he and his Fed will lower interest rates. That will cause the rest of the world to start moving in the right direction, especially emerging market countries and companies that have borrowed money in US dollars. See, as the economy here weakens and the dollar with it, other economies and their respective currencies will strengthen. That will actually be good for them and much worse for Americans. And this is what will be different from the Great Recession when the dollar actually strengthened as all economies faltered. Which is one of the biggest reasons I see the next recession being worse than the last one.
Well that’s it for now, there’s not enough time to address his whole interview in one quick piece here. Thanks for reading Volume 64 of The Macro Market Wrap Up With The Mad Genius. Make sure to leave your comments and questions down below. And remember there is always a bull market somewhere in the world, and on the opposite side of every crises there lies opportunity.
#economics #investing #ratehikes #recession #Federalreserve
