Whats More Important?
Since I like to mix things up now and then, I have decided to give readers two different streams of consciousness.
The first stream probably would fit better on a Monday but I don’t have control of when the Federal Reserve meets and when they announce policy changes and what not. So, the first part of my Substack will touch on the Fed and what could possibly happen this afternoon.
This may not be all that funny now and if you don’t get sarcasm, it won’t be funny at all. While working on the floor of the NYSE there were certain traditions that held up over time that for the participants, were just plain funny, and yet the general population just wouldn’t understand. The one tradition around the Fed meetings was that at 2:15-2:20pm on the Wednesday of the FOMC meeting the trading floor would go silent. Waiting with baited breath to hear what Chairman Greenspan or Bernanke were going to say, we would drop to dead silence. The funny thing about it was, we couldn’t hear a thing while he was giving his speech but we would sarcastically quiet down as if we could. I guess you had to have been there.
Back to Chairman Powell and today’s speech. The expectation is that the Fed will start raising interest rates in March and that the announced end of bond buying will happen probably in the same month. Historically speaking and knowing that Chairman Powell is not one to create waves in any market, I expect that the Fed will do just that, raise rates in March (with more rate rises possible) and hold the course on repurchasing debt. This most likely will be another big yawn and the markets will have a reaction (either up or down, who knows) and life will go on. One possible fallout will be some softening of the volatility we have seen in the last week. Knowing is better than not knowing.
Is that the right thing to do? Thats the question some will ask. Personally, I like things straight up and simple and we all know that is not possible with the Fed. They leave so many doors open because they never wan’t to be 100% right or 100% wrong, so there will always be some sort of out. I say to Hell with that. You want to raise rates? Drag it out to see how it will affect inflation? To see how it will affect growth? Whatever the reason for doing this slow dance I think you have to commit or not commit and be firm. The reason is fairly simple. If the Fed raises interest rates 25 basis points, it will signal that a tightening rate environment is coming but it will do little to nothing to tamp down the inflationary environment we are in right now. Do it again. Similar results. Now let’s say we are into the summer, another rate hike of 25 basis points signals the same thing, but does it work at combatting inflation? No, what works with combatting inflation is time and putting the breaks on government spending. By the summer, a lot of the excess cash in the system will be drained out and the economy will be on its own. Surely, corporate profits will return to earth and all those people that said that they don’t want to work anymore will decide that it probably is time to get back to work since their parents have stopped paying for their Netflix account in May. “The Great Resignation” will fall on its face due to the reality of life. With all those chipper young Americans looking to get back into the labor pool, wage inflation will slow and the only excuse left for rising prices will be supply chain issues and as I have said in the past, I think that is a load of bull as well.
What do I think the Fed should do? Stop supporting the economy today. They tapered, turn the spigot off. The only sector that impacts is the banking sector and I think it is time for the banking sector to pillage and plunder without the help of the US government. Without that cheap supply of cash, banks will raise interest rates on loans and that works just as well, if not better, than the Fed raising rates. Banks are going to earn mammoth amounts of money no matter what, why should the Fed help them?
Next, you want to raise rates, go ahead but don’t be spineless, raise them 50 basis points now and raise them 50 basis points in March. You want to shock the system, there you go. After each rate hike, the markets will adjust and then they will do what they always do, function based on earnings and growth. Knowing the exact cost and moves by the Fed now will make businesses understand costs better regarding future costs of borrowing. Leaving the door open for 3 different scenarios does not help anyone.
Let’s be honest though, that will never happen until someone appoints me to the Fed.
My next thought stream is about the Russians, Ukraine, NATO and the United States. Ever the optimist (regardless of political affiliation) I would like to think that President Biden will act in America’s ( And Western Europe’s) best interest regarding the Russian provocation in Ukraine. I am not calling for an out and out confrontation with the Russians and I am not really sure Vladimir Putin really wants an actual fight with the US and NATO but we need to be firm here. Putin is a master manipulator and he is pulling strings that we have yet to see but what we can see is that he is going to test US resolve in this part of the World.
From what Putin has seen so far of President Biden he seems to be pretty comfortable with his plan so far and up until a few days ago I would have to agree with Putin. However, something tells me that even though he has fumbled pretty much every ball given him at home, I think Biden will show some sort of backbone and not back down from keeping President Putin from accomplishing his latest mission.
There are times when sanctions are affective and needed and then there are times where a military presence is needed and it seems to me that we probably need to show some muscle and resolve and send a very stern message to President Putin that this is not the course of action you want to take. I am no military expert but it seems that Putin wants to push Mr. Biden as far as he can without actually firing a shot. He has seen weakness in domestic issues and probably feels he is just as weak internationally and he wants to expose that. His Chinese friends are watching.
The fact that Vladimir Putin wants to eventually get the Soviet Union back together again is worrisome as well and I do think the Biden administration understands that. If Ukraine drops, who’s next? Kazakhstan? Latvia? The whole Baltic region? The immediate picture is very important but the bigger picture is also very important as well and if I remember my World history, every major conflagration starts with seemingly small conquests.