A Failure to Fear Monger
Welp, guess I’ll join the legions of financial/investment writers out there and talk about inflation and the Fed.
Even with banks failing and a big jump in the number of economists and strategist-types saying recession is about to take us all for a ride to lower stock prices, the Fed is still the one driving this crazy bus…
And I might as well get right to the point: it is highly likely that there is only one more small hike coming, and that will be it.
A 25 bps hike in May will take the Fed funds rate to 5%-5.25% — right in line with the rate of year-over-year inflation indicated by this morning’s Consumer Price Index (CPI) reading.
No doubt Fed Chair Powell is breathing a bit easier this morning. Because interest rates have been pushed to the point that things have started to break. Like banks. And frankly, that’s what higher interest rates are supposed to do – break stuff.
It’s kind of the Fed’s dirty little secret. They say that higher rates will dampen demand, or slow hiring down, or reign in home prices – and all sounds fairly benign. But the subtext is that none of these happen unless something breaks.
The U.S. economy is 70% consumer spending. We spend money. That doesn’t necessarily mean we spend lavishly. We take vacations, we go out to eat, we get NetFlix and internet in our homes, we have iPhones, we buy clothes – and these are all mostly considered day-to-day expenses (and, man, have these “day-to-day” expenses gone up since I was a kid). And we don’t cut any of these expenses unless something really bad happens.
Likewise, companies don’t start firing people unless some aspect of their business breaks down. Banks don’t tighten lending standards (thereby slowing the velocity of money) unless they absolutely have to…
But the thing is: when the Fed starts hiking, it is a tightrope rope walk. The Fed well knows that something’s gonna break, it just doesn’t know what, exactly, the weak link will be.
For instance, the accusation that bank regulators had no idea that regional banks like Silicon Investment Bank were in a tight spot is ridiculous. Of course they knew. But what were they supposed to do? Force the bank to sell assets and turn paper losses into real losses? Or sit back and hope it doesn’t blow up in their face?
Seems to me the speed with which the Fed and Treasury acted to backstop all deposits is a pretty clear indication that they were hoping for the best, while planning for the worst…
Oil Answers the Fed’s Prayer
Now I know, a fair percentage of Americans believe that a fiat monetary system is the sum of all evils because it’s based on, well, belief. But c’mon. What else is there? It’s silly to think that a paper dollar is dumb because its value is defined by a belief system while a nugget of gold has a value that is ordained by the laws of nature. The value of gold is still defined in dollar terms. As are stocks and bonds and houses and cars…
Of course it’s all a confidence game. And frankly, this is what sets America apart from much of the world. I don’t know why, but Americans have the capacity to believe the craziest shit – and then make it real. We believed we could fly, go to the moon, and even get to Mars. Two grad students thought they could map the entire internet. A guy in a black turtleneck thought he could put a supercomputer in your hand that could connect you with anybody on the planet…
Right now, there’s high school kids coding in their rooms thinking they can change the world. And some of them will succeed…So when Treasury Secretary Yellen is standing on the podium declaring that the U.S. economy is strong, and that the banking system is sound, yeah, she sounds a bit loony. I mean, a few banks did just fail. But you’re probably not turning to your spouse and saying “Gee honey, we should probably cancel dinner reservations, I think Janet Yellen has lost her marbles.”
Anyway…
The Fed is playing the same kind of confidence game. Tough talk on inflation from Chair Powell is part of that game. And I gotta say, he’s getting better at it. Because even as inflation has moderated and things have started to break, Powell’s message has been pretty consistent: we have more work to do on inflation, we remain committed to bringing inflation down to target, rates will stay higher for longer, and so on and so forth.
Underneath the tough talk, Powell is praying that inflation does indeed come down more before more stuff breaks. And in March, oil and eggs answered his prayers – egg prices fell 10.9% and gasoline prices fell 4.6%.
Oil spent most of March trading between $65 and $75, after spending February between $75 and $80. So, yeah, no huge surprise that March CPI was a bit lower than February. Of course, just to keep Powell on his toes, oil gapped over $80 on April 3…
Goldman Sachs Says
Yesterday, Goldman Sachs sent out a little note yesterday, saying that if this morning’s CPI number came in higher than expected, the S&P 500 would sell off 2%.
Pretty lame bit of fear mongering, really. Because if the S&P 500 fell 2% from yesterday’s close (4,108), that would take it ~80 points lower, right to its 50-day Moving Average (MA) at 4,032. And if all the bears (and Goldman Sachs, I guess) could muster from a disappointing inflation number was a test of the medium-term trend line (50 day MA), well, that would actually look pretty good on the chart.
And when I look at what the bears have managed to achieve since the mini-bank crisis 6 weeks ago, well, it ain’t much.
I guess you could call the March 13 low at 3,808 a re-test of the December lows. But all I can think is that “what we have here is failure to fear monger.”
The Great Financial Crisis (GFC) was about banks. And when investors believed that there was light at the end of that especially dark tunnel, bank stocks led the way. Shares of Bank of America (NYSE: BAC) doubled in 6 weeks.
This bear market has been about tech stocks. And we’ve already seen tech stocks outperform in the wake of the Silicon Valley Bank failure. As I wrote on March 31:
Since March 13, Apple (NASDAQ: AAPL) is up 8.5%. Meta (NASDAQ: META) is up 16%. Microsoft is up 12.5%. Google (NASDAQ: GOOG) is up 11%. Tesla (NASDAQ: TSLA) is up 18%. Amazon is up 13%…
Even though the S&P 500 is around 1% higher than it was on March 31, none of these Big Tech Piggy Banks (as I call them) has advanced much. Tesla, Apple and Amazon are actually lower. In fact, Amazon is bouncing off its 50-day moving average (MA) at $98.39 today. If you’re looking for a trade, Amazon has a good set-up for a run at its 200-day MA at $107.25.
Earnings season is right around the corner. And there’s a very good chance that we see some earnings misses and lowered guidance from the tech sector when they start reporting in a couple weeks. I sure hope so, because tech will be the place to be when the rate hikes stop, and I want to add some good ones on weakness.
That’s it for me today, take care and I’ll talk to you on Friday.
Briton Ryle
Chief Investment Strategist
Pro Trader Today
Email: brit.ryle@protradertoday.com
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