Will It Make A Diffenerence?
Trying to write something interesting and informative in a column like mine is a challenge when there are dozens of things to write about but today, it’s almost impossible.
There really isn’t much to say regarding the economy, the market or business in general and to be honest, that’s a good thing.
Things are humming along as far as the eye can see. People are working, companies are making profits, the Fed is sitting on it’s hands and price rises have slowed to a trickle.
All’s right with the World right?
Not so fast skippy. I wouldn’t be who I am if I didn’t find a crack in something.
Politics is easy. 95% of all politicians suck. There, that was easy.
Business on the other hand is tougher when from the outside, things look to be going very well. However, I am here to throw a little caution into the mix.
Yes, the S&P hit an all time record last week and while it was about two weeks too late, it’s always nice to reach a new record high. Gives investors a little pep in their step as they know, without looking, that there portfolios are probably doing well. They may have even regained the money they lost in 2022. Maybe.
The running data that we have seems to show that labor participation is doing well. Wages are rising and people have been spending. They may be searching for things to buy since over the last 2 years, the consumer has basically purchased everything that has been manufactured on the planet. Spend, spend, spend I say. Until you start spending on Beanie Babies or Pet Rock collectables, thats where I start to worry.
My motto (one of them at least) is “If you are working, you are spending and businesses are making profits”. That is the nature of the US economy and has been for the last 50 years. Consumers rule.
That is why this weeks calendar may be very telling. With the plethora of data coming out this week, I think you can get a pretty clear picture of where the consumer stands.
Durable goods orders while not the great indicator many think it is is helpful. People spend big when they are comfortable in their economic condition. Inventories is a sign of the production side of the equation. Again, not a great indicator but it presents a piece of the puzzle. Personal income and personal spending are good indicators and once you parse through the fluff you can get a sense of what is developing in the economy. The last set of numbers that I think are important and I believe the Fed uses them to gauge true economic activity on the consumer side is the PCE index. Getting this number year over year below 3% is the primary goal of the Fed right now and while I don’t think it will impact the Fed when they meet at the end of the month, they will be keenly aware of it going into meetings in March and May.
This “Fed Watch” we seem to be transfixed with has been going on for a very long time. I remember back in the 80’s and 90’s we would always wait for the Fed’s decisions on rates or when they released the money supply numbers. I was a novice back then and I never got this fascination with M1 supply numbers. I still don’t and I rarely if ever hear it mentioned, thank God. However, interest rates are a different matter altogether.
The raising and lowering of the Fed Funds rate has become the main tool used by the Fed in trying to stoke economic activity or slow that activity down. It usually works but any move by the Fed with regard to interest rates has to be looked at with a much longer term lense. That is where people’s expectations need to be tempered and I think people also need to be educated about the time frames of results. Many people expect immediate results from a Hawkish Fed. Yet, it actually takes anywhere from 12 to 18 months before the true effects of a rate rise can do their job. This doesn’y necessarily happen when rates are declining. Generally, the economic (and inflationary impact) happen a little faster, lets say 6 to 9 months.
Fed rate moves have a much faster impact on equity markets. This is sort of a casino effect.
Investors bet on rate rises and rate declines with the expectation that the results from either action being pretty predictable. With the premise that the Fed will be entering a rate reduction cycle, investors have jumped on board because lower rates create a more profitable environment for corporations.
2023 may have been an equity rebound year after the disaster that 2022 was but it was more about the expectation that the Fed was done raising rates and they were going to start cutting rates. The bet played out for half the year and when it was obvious that is wasn’t going to happen in 2023, stock sold off some. Then the Fed announced that they were pivoting and off she went.
This year will be partially about rates for sure but it will end up being chjallenging for companies as they navigate a slowing economy and the fact that a lot of producers have lost their pricing power. That will be the challenge.
2020-2022 producers had the power. They lied to us and said costs were going up because of supply issues. Yeah BS. They raised prices because they could, no pushback because they knew they had the consumer by the you know what. 2023 turned those tables and they don’t hold the pricing power that they used to. All of a sudden, they have an oversupply of products. Hmm, suspicious for sure.
I think that someone at Harvard (when they are not trying to get their collective act together) or Wharton should do a case study on one of the most obvious abuses I have ever seen in modern economic times. That is how the dairy industry created shortages and raised prices of a myriad of products without really having any shortages at all.
The case example would have to Eggland Eggs. They have what, 800 million hens laying eggs? They had the same amount of hens laying eggs 3 years ago and last year and every year. They produce billions of eggs a year. How does a dozen eggs go from $2.29 to $4.99 in the span of 8 months. The hens don’t stop laying eggs. Anyone who has had the pleasure of a good sized chicken coop knows this all to well. You feed them, they produce. Like clockwork, 5 to 7 eggs a week. Maybe a little less in the Winter but those hens, they keep going. So why did the prices shoot up? Fuel prices? Hmm. I won’t bore you with the math but a dollar rise in gas prices adds about 6 cents to a dozen eggs. Labor? I did some research here too. They could pay every employee that works at one of these chicken farms $25 dollars an hour and the price of eggs would go up less than one cent. Remember, these farms have 5 to 10 million birds on them and 15 employees managing them. Oh wait, grain prices went up. Nice one. I checked, grain prices spiked twice in the last four years, the beginning of the Pandemic and when the Ukrainian war started. The prices now are 6 % higher than they were back then. Oh wait, I forgot, Eggland said they had the Avian flu kill millions of birds. Yeah, ok, I did some research on that and I couldn’t find a whole lot in local papers in Arkansas, Maryland or New York about this devastating avian flue.
Sorry to bore you with that example but I am trying to make a point here. The producers no longer have pricing power and that will eventually affect corporate earnings and as my good friend Larry Kudlow likes to say “Earnings are the Mother’s milk to rising stock prices”.