Time To Ramble On

I do this sometimes, have one great idea to write about and then it morphs into five other ideas and my columns end up being confusing. Today, I will state up front that I will be digging into several ideas I have.

The first one is about the Federal Reserve and it’s slow mishandeling of the economy right now. The fact that it will have taken the Fed over twelve months to realize that inflation is a serious problem facing Americans is proof positive that the Fed has no clue what is happening “on the ground”. None. Using data from various US agencies to determine the extent of the problem is dumb.

Last year, I was pretty clear as to why the data was not reliable and maybe it was politically watered down as well. Think about this; How well an administration does is directly related to peoples pocketbooks. If people are doing well and the economy is growing, the administration looks great. The economy gets knocked on its butt and it is the administration that takes the heat, as it should be. So if the administration, which controls the labor department, puts out reports stating the core inflation is 3% annualized, the Fed doesn’t need to react, the White House looks good and everyone in Washington is happy.

Well, it was and still is, a lie. Their data is skewed. It is incorrect and has been for months. The administration, sensing something was amiss, repeatedly blamed Covid, Supply chain issues and whatever else it could come up with without really admitting that inflation was a major problem.

Not until it was too late.

Now we have an inflationary environment that doesn’t seem to let up. The administration has been protected from the fallout because it has excuses and I honestly don’t think that the administration is at fault for all of it. Sure, they dumped trillions of dollars into the system, a system that was not functioning properly, but that’s not their fault. They had to do it. Eh, maybe. Some of the largess was needed, early on. It surely helped and that should have been it. However, the administration in its infinite wisdom felt more was needed, and more, and more. You want to stoke inflation? Throw trillions of dollars at an economy that was running at half speed, see what happens. So, maybe they are to blame. I will let people much smarter than me debate that at a later time.

The biggest Fubar was the Fed. They propped up an economy when it didn’t need it, continued to do so and never really got out of the accommodative phase when they should have 10 months ago. Yes, I know that the Fed is traditionally slow to act, but there have been times when it acted quickly (2008) and prevented a major collapse in the economy. This was not that time.

Enough with the hindsight already. What should be done now and in the near term?A substantial upward move in interest rates at first may do the trick. It might not have the effect they think it will however. Most companies, now, will pass on the increased cost of borrowing to their customers. Hell, they have created shortages where shortages don’t exist to raise prices, why not pass this increased cost along as well. I think the bigger picture regarding rate increases is the mental effect it will have on consumers and I do think there will be a change in the demand picture with a larger rate hike. Consumers may just pull back and say enough is enough and demand will no longer drive pricing, wage hikes will, which is more typical of an inflationary period.

The important thing to remember is that a small incremental hike of 25 basis points will do little to slow inflation and its effects probably would not be felt at all in 2022, so why do it? A bigger hike will impact things, for better or worse. The impact will be felt quicker and yield results sooner. Two larger hikes this year, would most certainly do the trick.

Ahh, a rising interest environment will crush the housing sector you say. Well, yes, but mortgage rates in the 4-5% range are not disastrous. Construction will continue and mark my words, commodity prices will come back to earth making the building of homes substantially cheaper. So, you have rising interest rates but new construction will cost roughly 10 to 15% less. My math seems to say that it probably will be okay for new home buyers.

My last thought, and it is pertinent to the beginning of the year, is about earnings. The “Mother’s milk of stock price” as my friend Larry Kudlow likes to say will be back to a more normal course. The last two years have seen disruptions and recalibrations of every sort effecting the economy and corporate profits but 2022 will have none of that. Year over Year numbers will be decent if you look at a 30 year graph on corporate profits and that means anywhere from a 10% to 20% growth in corporate earnings. Part of that growth will be attributable to inflation and part will be attributable to normal growth cycles.

What does that mean for the stock market you ask? Well, I am here to answer and I believe we will see modest stock appreciation this year. Money needs to go somewhere and it will continue to flow into the stock market. Corporate earnings won’t excite but they won’t disappoint all that much either. Too wishy washy? Well certain sectors will flourish and I can see the energy sector continuing to have a good run here. Stay away from anything to do with Communication services. That game is over. Oh, and don’t forget I still think we will see a correction. We may be in the beginning of it now so keep an eye on 4510 on the S&P. It breaks through there for more than a couple of days, we will see a real correction.