According to a few of my readers, I have strayed from my chosen mission and it is time to get back to what I started. Business on Mondays, Politics on Wednesdays and Music on Fridays. You bellowed, I listened.
I have found that it is very hard to stay on point when so many divergent things are happening and I will try to refocus on the program and stop melding one thing into another. It’s my AADD working.
Let’s go at it directly today.
First things first. The Bond market. I think it’s become pretty clear that bonds are driving the market right now. I don’t spend a lot of time on discussing the bond market because frankly, I have spent a career in equities and just do not fully understand the complexicities and the simplicities of the bond market. I just know, right now, it is driving stock prices and I also know that whenever the bond market takes ahold of things, it’s usually for a longer duration that lets say, any geopolitical event.
The national media likes to play the geopolitical angle wherever they can and the equity markets are no exception, but trust me. Unless it’s nuclear or on our shores, markets disregard it after the first week or so.
Not the bond market though because looking at it simplistically, money moves out of equities during times like these and moves into the bond market. I know it’s way more complicated than that but in a nutshell, that is where we are.
Given the fact that the earnings have been better than expected, (as I said they would be) that can be the only explanation for the softness we are seeing now.
Next. I am no proponent of using GDP numbers for anything other than a statistical look back. Present day, it means nothing. It is the ultimate lagging indicator and while I love statistics, what developed for the last three months does not really do it for me. Yet, we had an incredible GDP number last week and that strength really should not be discounted. The second question that is always asked after seeing that print is what does it do to the Fed’s agenda? If this were the ideal world, it would do nothing. The trends are there and they are helpful but the reality for the Fed is more present day. What does the job market look like? How are the CORE inflation numbers showing up? The Producer Price index and wage growth above all else. This is what the Fed puts more stock in. The JOBS report this week should hold some interesting clues as to what the Fed may do.
I have said this a few times before. I think the Fed should get off that dusty mountaintop and go to ground. Just get your data but talk to the people who lead everyday lives and see what they are feeling. Have a panel of successful small business men and talk to them and see what they are seeing. Get a better view of the real world. I remember saying this very thing over a year ago when Fed Chair Powell said inflation was “Transitory”. They are smart but they are too far removed from the real world. It’s like having academics do the decision making. Obviously, this will never happen.
What may happen and what should happen is the Fed’s target for inflation should be bumped up a little. Getting inflation down to 2% I think is undoable. Producers have seen profits soar because this inflationary cycle has given them pricing power they haven’t had in years and they are not going to want to give that up. That is the bottomline. The pushback will not be from the consumers, they are willingly paying the 7 dollars for the Philadelphia Whipped Cream Cheese, it will be from the manufacturers. Even with the highest rates in two decades, the consumers haven’t stopped spending. Producers know this. The Demand side of the supply demand curve is still very strong no matter what the Fed has tried to do.'
Forget 2% and shoot for 2 1/2% or 3%. That is realistic and the tightening cycle will end sooner rather than later.
Being hellbent on a number that was artificially achieved initially is a fools game and it seems that the only way the Fed can achieve that arbitrary number is by causing a recession.
Remember, I believed that the Fed was going to go to around 5 1/2 to 6% and they are there now, anything more will tip things to a place they said they wanted to try and avoid.
Now for the part where I will get a lot of pushback.
To start, the student loan debacle is not and will not be the debacle it was once thought. In a multi-trillion dollar economy how is a small (very small) portion of that economy going to impact the whole? With this thought that student loan forgiveness is ending for thousands of recipients and that will tip the economy back, I will say it straight up, that is the dumbest thing the talking heads have come up with this year.
It is in the neighborhood of 40 billion dollars and those loans are spread out over 20-25 years. It is not like a bill for 40 billion dollars is coming due November first. It is more like 125 million dollars coming dues (Might be less, High school math). Yea, ugh, that is going to cause a real tidal wave in the US economy. The program made sense for one year and it should have ended then and never been brought up again. Everyone borrows money, either for a house, a car and an engagement ring. You borrow it, you repay it. If you can’t, you sell what ever it is or you take the last resort and file for bankruptsy. Why should student loans be any different? I am old school and I don’t believe any person is entitled to anything they haven’t earned and you borrowed that money, you need to repay it. Sorry, that’s cold, I know but let’s just help everyone take responsibility. But I digress, again.
The fact is that it is a small drop in a very very large bucket. It will not affect consumer spending all that much so let’s stop putting that in the mix.
Next, there is nothing in the data so far that would lend you to believe that we are superheating the economy. People’s debt levels have gone up some but that could be attributable to higher interest rates along with the actual adding of new debt.
To explain that simply I will use a very simple example. A person has 2,000 debt on their Visa card, and they spend about the same every month. That person pays 250 dollars a month to “pay down” their debt. two years ago when interest rates were rock bottom that $250 may have paid down $225 of principle and the other $25 went for interest. Now, interest rates are higher so their $250 payent only draws down the balance by $200 and $50 goes to pay interest. So, with similar spending, that person’s debt has increased by $25. Get out a pen and paper and you can do the math for yourselves and you will see, even with all things being equal, that person’s debt increased. This continues for months and you can see where the debt increases may come from.
Ah, but savings levels have gone down by more than debt levels rising. That may worry me more. Are people moving savings to someplace where they can earn more than what banks are offering? I think that may explain some of it. A savings account at a bank is still the worst place to put your money. Banks don’t give two sh**s about offering a rate that is close to matching the current rate environment. They don’t have these robust earnings because they are fair and want everyone to take advantage. It’s like Vegas, they didn’t build these shiny palaces because they let people win.
A side note. I talk a big game about banks but the fact remains, I own a bunch of them in my portfolio. I may hate them but I ain’t stupid.
Back to my discourse. I do think there is some money moving out of savings accounts that is steered toward paying down some debt but if it were a real movement, the debt needle would be moving in a different direction.
These two things however do not represent any sort of problem right now. They are interesting notes because this scenario generally happens as economies start to faulter. I don’t see that at all.
What I do see is a market in a bit of turmoil and ripe for some excellent stock selections. The weakness is not caused by a weak economy. It has another uncommon driver and while this upheaval can be disconcerting at times, the focus still needs to be on earnings and that is still going to drive the market until the end of the year.
Thank You for responding to the bellowing. Excellent column today and don't forget Fridays Music day.