Man of Action
“Man of Action” would not be three words to describe Fed Chairman Jerome Powell. Inaction or reaction would be a better term.
Until now.
Not really but after parsing through Chairman Powell’s speech last Friday at Jackson Hole ,WY, I can honestly say, he sounded determined and there was no pussyfooting around. The Fed was going to continue to act aggressively to squash inflation and get it back to that magical 2% level. A level we had up until the Pandemic tilted the planet on its side and screwed everything up.
Obviously, markets reacted poorly because I believe investors were looking for something less hawkish and possible a pivot point where rates would stabilize and come back down over time.
Everyone loves low rates. Everyone wants those low rates to return. Ah yeah but the reality is even if get to something in the 3 to 3 1/2 % range, that is livable and businesses will adjust. Homeowners will adjust. The World will adjust and we can still have an expanding successful economy.
The point is, we will need to adjust our expectations. Having inflation at a 8% or higher clip for any extended period of time is way more dangerous than having interest rates at or around 3%.
Let’s look at this simply. With rates at the level for an extended period of time, savings rates will go up. Not to 3% but more than the .0000025% rates that banks are paying their most valuable depositors. Trust me, banks do not lose a penny on savings accounts and the BS that they need to take some sort of maintenance fee for taking your money is nothing short of criminal. Another fear of higher fed rates is the interest rates that credit card companies charge for unpaid balances. I am not sure but on my credit cards they charge anywhere from 15% to 24% on unpaid balances. And that is because why? The infrastructure to maintain? I don’t think so. The charge venders 3-5% for the luxury of having access to their systems and considering that Americans alone charge close to five trillion dollars a year, you have to believe that is enough free cash so they can pay for the infrastructure. The credit card companies are always afraid of defaults and that is why, they say, that they charge such high interest on purchases. Hmm. Interesting since defaults have gone down significantly during the 2019-2021 period. The fact that American paid these companies 119 billion dollars in fees in 2020 seems like enough to cover less than 1% in defaults no? So, if they say we need to raise our interest charges by an appropriate amount because their cost to borrowing money has gone up, now you know. I am not against companies earning money, I am a capitalist to my very core, but abuses by banks and credit card companies is rampant and rising interest rates will only feed the beast.
Recollect if you will, back in ancient times (70’s and 80’s) rates on credit cards were capped. Some states it 13% some were 18% but each state had fairly restrictive lending policies. Then hyper inflation and Fed rates rose and topped out at 18 or 19% for a very short time. When this happened, banks and credit card companies lobbied hard to get caps removed so they would not be taken under. If they had to pay the Fed roughly 18% for money and they basically loaned it out at 14%, they lost money. That was quickly fixed and caps were lifted and banks along with credit card companies could charge what was fair and reasonable. Ok. Rates drop over the next three years but credit card companies rates did not. They continue to this day to charge rate just below what a loan shark at your local social club would charge. They have the previously mentioned excuses but they don’t hold up and now we are in a rising rate environment and you can be damn sure loan rates will rise exponentially.
If you haven’t figured it out by now, I am no fan of banks in this country. The intensity in which they take advantage of their customers is legendary and it continues unabated. Yes, I own JPMorgan Chase and have for decades. They, like every other bank have figured out within the confines of “Two Big To Fail” how to make money, lots of money. Doesn’t necessarily get returned to the shareholders but no shareholder will complain. The banking stocks are well positioned no matter what calamity strikes.
Once again, I have veered off subject but my point is, Chairman Powell is on a path to get interest rates to 3-3 1/2 % by the end of the year I believe. I don’t think it’s a death knell to the US economy. I also don’t think that it is a death knell to US stock either.
It will be a balancing act to keep the country out of a real recession and that is what spooks investors most. I still believe we have a 66% chance of going into a mild recession and I don’t think it will be a long one. The labor market seems to be that one bright spot and don’t kid yourselves, that is very important. People working means people are spending and spending is what Americans do best. That strength, if it stands up, will surely mitigate some of the effects of higher interest rates.
The wild card to the recession story is this: If the housing market keeps dipping, we could potentially have a recession that no labor market can help.
It’s about psychology as well as about actual facts. When people see their portfolios growing by five or ten percent a year, they feel comfortable and maybe even a little rich. They spend. When they see their neighbor’s house sell for $30,000 over asking price they feel rich as well. They will spend. Maybe on that house or maybe on something bigger, in a better neighborhood. Point is when housing is rising, it floats a lot of boats.
Now, the reality sets in and housing prices are coming back to more sustainable levels, which economically is a good thing, but not when it’s your house that you thought was worth $750,000 is now maybe a more realistic $625,000. Now you are not moving, now you are not building a new deck. Now you aren’t going to renovate the basement. So, spending slows down. That is were you have a real recession.
We have had recessions in the past and invariably housing is the first thing to get impacted. Other than the fake recession caused by the Pandemic, every recession we have had was precipitated by a housing slowdown.
To tie this up with Chairman Powell’s speech and to open up a whole new can of worms we have to understand that the Fed looks at several different data sets to determine the shape of the economy. Several of them are lagging indicators and that might explain the slow movement from the Fed over the last 30 years or so. This is not an organization that makes split second decisions. It looks at the bigger, dusty picture when it probably should be looking at and using other tools to be one step or in step with the economy. Powell was being very forthright, a new paradigm for sure but being clear and honest is all well and good when you are addressing shareholders but when it comes to steering our economy, I would prefer decisive action at the onset and honesty later.