There are a multitude of stories floating around today and it’s hard to pick just one to write on so I will drop a few on you.
Since it’s the day after the Super Bowl and to put it bluntly, that was four hours of my life I will never get back. The game was ok, it had it’s moments and since I had no skin in the game other than a 9-2 score or an 8-1 score, I really wasn’t all that interested. The halftime show was horrible to put it kindly. I could not make out the lyrics to pretty much any song and it looked to me that a lot of it was lip synched but what do I know. I really could care less what explanation the NFL gave for having Snoop Dog up there but I bet every police officer in this country turned it off. The saving grace of every Super Bowl are the commercials. Well, I laughed at a few and this morning, I could not tell you which ones were funny. The only commercial I remember was the NFL’s one where all these claymation(?) figures destroy a house and ruin a family’s Super Bowl party. That’s it. Congratulations to the 1100 fans of the Los Angeles Rams and I am sure we will see Joe Burrow back in this game again.
The bigger story is Ukraine-Russia and that seems to be dragging on longer than the Super Bowl. Each week the State Department says “This is the week” and then the week passes. The Russian are agreeing to sit down and talk and work out something. Some of the Russian demands will never be met and Putin knows it. He wants to pressure the West and get something out of it. Backing down I don’t think is an option. Putin is a strongman and strongmen don’t back down. They force an outcome in their favor so they look like true heroes to the homeland. What will happen? No clue. However, whatever happens, rest assured the market will react quickly. Most likely, a major selloff, but as you know, these geopolitical events generally effect markets in the very short term.
The biggest story and the one we do need to stay wary of is the Fed. St Louis Fed President Bullard has said that the Fed needs to act aggressively and get ahead of this instead of lag behind. Front loading their response. Uh, I did say that several months ago but who listens to me anyway? I will give Fed President Bullard credit for coming out and finally saying what everyone on the planet has been saying for over a year. They need to act decisively and regain some credibility. I am sure Mr. Bullard will be getting a phone call from Jerome Powell today but that’s the good thing about the Federal Reserve, policy is consensus and comments are individual. How they speak and how they vote should be one and the same so lets see what happens in March.I still say it will be a 50 basis point rise in rates and hopefully Chairman Powell will be honest and say that this is the first of four rate rises this year, all with a minimum of 50 basis points. Never happen though. The Fed will never pin itself down to any one course and that has been policy for as long as I have been in the business but I think being transparent and upfront will settle markets more than a floating question mark.
So what do we expect? Well, if the past is prelude, expect Fed Governors to walk back Bullard’s comments a little and give the party line, “We will be watching the data closely and making a decision based on the best data available” One thing for certain St. Louis Fed president Bullard will not be walking back his comments. The markets are already pricing that move in and should it play out that way, little disruption will happen because of it. Short term. Longer term is a different story. If the Fed acts forcefully and gives some clarity as to what actions they plan on taking, markets will respond in kind.
I will throw out an idea that might make some sense of that response. Markets have been on some sort of unrealistic trajectory since December of 2008. The economy rebounded out of that self inflicted recession and steadily climbed for 12 years until the pandemic hit us in full force. Yet, the equity markets barely caught their breath during the last 14 years. Small pullbacks but nothing that could actually be thought of as a true correction. With that rising stock market and growing economy (if you think an average of 2.6% GDP growth is a growing economy) people felt rich. The value of all households grew by 50 trillion dollars over that time frame. Everyone (almost everyone) felt richer. Once you start raising interest rates and cooling down the economy, you start cooling down the stock market. People don’t feel as rich as they did six months or a year before. It changes consumers perceptions. That alone will slow demand and slower consumer demand results in weaker earnings and a slowing economy. My point is a rising stock market gives consumers the feeling that things are great and they will go out and continue to spend. When the markets correct, consumers (who are still earning the same) will spend less. It is market psychology transferred to the general public. Look at every downturn or recession, markets sold off prior. That is simple economics but it is often forgotten when you look at the economy as a whole.
The other point that I have made before is even with a 50 basis point move in the Fed rate, companies will just pass that on to consumers. I am not sure if that is what will happen but it makes sense because in an inflationary period, all increased costs are passed on to consumers. They do it because they can. Typically, rising costs in a non-inflationary period are absorbed by higher productivity, a slight hit on earnings, maybe a reduction in payroll. However, producers are being hit with higher wages, higher costs associated with commodity prices, shipping costs are rising as well and if borrowing costs rise it should continue to fuel inflation.
The core to all of this is that companies want to show earnings growth for their shareholders and to get that earnings growth, they need to raise prices. If a company (or companies) decided to hold the line on price increases and absorb some of the added costs short term, inflation could be muted somewhat. It will never happen but wait a minute here. 49% of the companies reporting earnings so far for the first quarter have said earnings will not be as robust in the second and third quarters so the groundwork is laid for possible absorption of rising costs.
One thing is for certain, the days of 6% increases in GDP are over. Not that it is an all important statistic, it does indicate a broader look at the economy and for some reason market pundits draw on it incessantly. Expect to return to a roughly 2-2 1/2% increases year over year.
Thanks for starting my day with a chuckle. I sure agree with your assessment of the game/lack of entertainment. But on to a more important topic, You were and have been spot on with your inflation call. Possibly you can take a cue from Tom Brady and rethink retirement, hint hint. America needs to replace Powell. He just isn't up to todays task for the economy, like potus isn't up to leadership which we desperately need on many fronts.
Thanks Rick. My Wednesday column will dig into that as well