If you had to ask me what the bears got most wrong, it’s pretty simple: Federal Reserve Chairman Jerome Powell’s remarkable ability to divine the moment and do the right thing. This week, I will have confidence, again, in his decision-making and while anything he says can cause a hiccup in an admittedly overbought stock market, his non-magisterial presence will leave the bears grasping once again.
We know there are so many reasons why this bull market has eluded so many. It’s mysterious way of starting in October 2022, so long before a tightening cycle was (or is!) near ending. It’s second wind, whipped into a frenzy of mega-cap tech buying, as scared bulls went for our equivalent of nation-states with better balance sheets. It’s sudden broadening into health care, transports and financials just when we were told the bull was slain by its lack of breadth.
No matter what, this bull, regarded as chimerical by some, and fraudulent by many, refuses to be recognized by so many BECAUSE the Fed is committed to fighting inflation at all costs, even as the Fed should be lauded for preserving the value of financial assets at a time of Washington-stoked inflation.
If we go back in time, the narrative’s been simple. Powell took rates too low, and we are all paying the price. It’s NEVER stated as Powell, unlike all other central bankers worldwide, sensed potential economic disaster from the Covid omicron variant, an unknown new and inexplicable wave of the pandemic, and kept rates low enough to be sure that this strain could be contained and then began the inexorable return of higher rates and beyond as he sought to rein in inflation caused by the president and Congress.
As we prepare for rates to go to a range of 5.25% to 5.5%, the 11th increase in 16 months, it’s time to explore why in hell Powell continues to be underestimated despite some trying times including inflation the likes of which we haven’t seen in more than 50 years.
You would think by now that the naysayers would have forgotten his late start and recognized the insane amount of stimulus that’s here and is beckoning, but there has to be a face on inflation and that face is Powell’s, not President Joe Biden’s.
I think that Powell’s deft handling of the public health crisis, taking rates to zero just when large companies were about to go bankrupt and his equal ability to start crushing inflation in a sotto voce way, maybe unheralded because this man seeks no acclaim whatsoever. He has never once boasted about anything to anyone. It’s almost eerie in present-day Washington to have someone who flies so low under the radar as to alienate no one but Wall Streeters and the Wall Streeters started digging in their heels months ago.
The bill of particulars against Powell is losing its cogency each time the averages rally — this time the Dow with ten straight days up, not seen in five years — and I think that it will disappear when wages stabilize and unemployment nears 4%. That’s when the critics might realize that we are entering a period of growth with modest inflation, with most of that coming from hundreds and hundreds of billions of dollars in much-needed infrastructure, climate control and manufacturing subsidies that are way too big for the economy.
One only needs to listen to the plaintive Taiwan Semiconductor Manufacturing Company (TSM) conference call to realize that our nation doesn’t have the manpower or the national ability to build one large chip fabrication plant let alone the many that are supposed to be headed our way.
Powell’s been playing for time with these rate increases — and if it weren’t for his earnest nature and the slowing one by one of the different components, we would realize that playing for time isn’t kicking the can, but much more an attempt to create growth with as little inflation as possible, AS OPPOSED to slowing growth no matter what the consequences.
I have been searching for a better term than “playing for time,” one less pejorative. Something like reining in softly but playing for time just nails it.
Think about it. There wasn’t a category of inflation that didn’t explode higher at the outset. But after food and clothes and cars and, retail, oil, natural gas, heating, and medical — all that’s left are housing and travel and leisure, with the latter pretty self-selected and inflected.
Of course, it’s easy to say that everything’s for naught if housing stays hot, but we are finally realizing that there are impediments that keep the price of housing up 40% since 2019, impediments that aren’t responding to higher short rates. Everything from a lack of supply to the difficulty to build homes, to the lack of a desire to hurt gross margins, something that’s made the companies’ stocks the belles of Wall Street, have made prices immune to higher fed funds rate entreaties.
The job creation that Blackrock CEO Larry Fink talked about recently with us on “Squawk on the Street,” the kind stoked by Washington, will keep home prices high, which could spur more building but not enough to lower rates substantially, although the small decline in price from DR Horton ‘s quarter is duly noted.
Plus, the rally in the financials will soon prove to be still one more test of Powell’s skills. Powell didn’t get the bank failures he needed to help break the economy. They never even got to Western Alliance nor PacWest , both up 25% this week. The equity market’s been shut down for ages, but that’s mostly because of the incredible greed of Wall Street and the SPAC (special purpose acquisition company) promoters. I believe the tens of billions of dollars destroyed by errant IPOs (initial public offerings) and SPACs have helped him in his quest against inflation.
So has the FTC (Federal Trade Commission) and Justice Department) in their desire to rein in deals perceived as being anti-competition, the standard that resonates throughout the proposed antitrust guidelines promulgated last week by the regulators. A quick read of CEO David Solomon’s comments from Goldman Sachs about how the dry spell is about as long as it can get, tells you that his firm sees green shoots in IPOs after, of all things, restaurant chain Cava — and M & A (mergers and acquisitions) after the FTC’s loss in its battle against Club name Microsoft (MSFT) in its attempt to buy Activision Blizzard .
So, to go full circle, the reason why the markets do not fear another quarter-point rate hike, or even one more after that, is that huge Congressional spending and a more robust capital market coupled with intractable housing issues are being curbed by Powell’s judicious hikes. It’s too bad that we all seem to focus on the Fed so much.
I hope readers here know that I felt that only by tuning out the Fed could you make maximum money in the market. You simply had to ignore the verbiage, block out the gasbags who simply failed to see the two-staged bull market right in front of them. The first started in crazy fashion, with the remaining industrials: talk about a scarcity. The second was equally nutty: a brand new technology still not understood and a handful of tech companies that had some clue of how to make money with it, turbocharged by the collapse of a couple of errant banks.
But now we are in the third phase where the left behind catch up and new companies join the fray. That’s where we find ourselves these last two weeks. The gains in the banks and health care were astounding. It wouldn’t surprise me if we didn’t see a new wave of buying in retail and entertainment after this weekend’s boffo box office numbers from “Barbie” and “Oppenheimer.”
The top-down navel gazers will get all of this wrong. They have long since stopped looking under the hood of the S & P 500 . However, the strategists who actually follow stocks and their movements are quietly stunned into bullishness because the sales are fine and gross margins strong. There will be nitpickers. I have gone over that American Express quarter nine-ways-to-Sunday and come up with estimates so far ahead of the company, based on…