Summer Churn
With the beginning of Summer, for real, yesterday, I am reminded of when I first started on the trading floor in 1981. As we approached the summer and the workload was daunting but doable, several of my associates said that the summer was here and volumes would shrink and would give me a better opportunity to learn. Uh, didn’t happen. The summer of 1981 saw at least ten record volume days and that nonsense about summer doldrums was just that, nonsense.
It has been like that ever since and while trends continue and old axioms still stick around (buy in spring, fade in May), they really don’t hold up all that well. The summer is just as volatile (if not more so) than any other period and we are going to see that again this year.
Last week, for example, was a semi-wild ride as the averages were all down by 2-3% after Chairman Powell moved up the Fed’s timeline for raising rates. As we all know rising interest rates generally work out to be a net negative for equity markets, even though several sectors can do very well in a rising rate environment. While I think that telling investors that the Fed is going to act aggressively to control inflation, even though they don’t see inflation as an eminent threat to the economy, by raising rates twice in 2023 is a load of you know what. A rate hike is looming. In two years! It’s almost meaningless because an awful lot can happen in two years and usually does.
I think the idea was just to let everyone know that they are not asleep at the switch and will act accordingly, even if it is a distant future. This to me is another example of the Fed not looking at things realistically. They say that inflation is not a major issue right now. Read practically every Monday Substack and you will see I fell differently. They feel that what inflation there is will be a short term situation and will correct itself. That might be true in some cases but my concern is not the upward movement in prices, it’s the fact that prices will most likely remain higher. Once again, producers have not had the chance to effectively raise wholesale prices in years, now they have their chance and they are taking full advantage of it.
The most important element of inflation is wage growth. Because of the almost total recalibration of the workforce in this country we are seeing drastic shifts in who wants to work, where they want to work and most importantly, how much they think they want to get paid. It’s a bit of a mess and like producer prices, labor will not be lowering their earnings expectations anytime soon. This is what will keep inflation active and important as we go through the rest of this year. This is what the Fed should always be looking at.
Looking at bottomline numbers like unemployment claims, Non-farm payroll numbers, participation rates and overall employment does not actually show how much upheaval the labor market is in right now. The Fed uses statistics and some incomprehensible Dot plot matrix to base their decisions. Maybe they should talk to the people who actually are living through this post-pandemic period and see what is actually happening on the ground.
One final thought, and it may be counter to what I have written over the last few weeks but I do have a valid explanation for the divergence. For the longest time I have felt that the Fed should not act during certain periods of increasing growth.
I was one of the few people during 2016 to actually go on CNBC and say the Fed was making a mistake raising rates. The economy was finally gaining traction after the Obama administration left office and the Fed was concerned about overheating. I said let the economy go. There won’t be an overheating of the labor market (we were still trying to recover lost jobs from the fiscal crisis), there won’t be inflation anytime soon. Why put a roadblock up? Rates didn’t really take off and then the Fed started dropping interest rates and becoming almost too accommodative.
While I do believe that inflation is a much more serious concern than the Fed is making it out to be, I have to believe that eventually there will be a recalibration in the economy and things will go back to a more balanced supply/demand situation and while prices will be higher, wages will be too.
The Fed probably should let it correct on its own. They are sitting in a much better position should the economy take off in a direction that will do more harm than good. They can tighten things up for a long period of time, raise interest rates strategically and generally be proactive. The trick here is when and how much?