What If The Fed Is Right?

Unhappy Wall Street.

Oh, I know. I almost hesitate to ask such a question. I can hear the shouts already: Didn’t I see the market yesterday? This is the biggest disaster since we pulled out of Afghanistan.

The Fed just made the very worst mistake ever. They’re sending us straight into a recession. Or worse.

Wrong-Way Fed. Jerome’s off his rocker. A fed that can’t get anything right.

I’ve heard them all.

And I’m certainly no fan of the Federal Reserve. If I had my druthers, I’d just as soon get rid of the whole institution.

And I certainly feel that much of the trouble we’re seeing right now is a direct result of the policies created by the Federal Reserve and the White House.

Endless stimulus, with direct payment of stimulus checks to residents. Multi-trillion dollar expansion of the Fed’s so-called balance sheet. There’s very little offset in the form of liabilities for all those asset purchases.

All of this led directly to the day, when the Fed, at last, had to take away the punch bowl. To stop the endless pump-priming, and money-printing.

To somehow begin a process of normalization.

And yet, the first time the Fed takes a meaningful step in that direction. Wall Street raises a tantrum. The kicking and screaming could be heard through my quote machine. To say nothing of all that red on the screen.

But just who was it that was raising all the ruckus?

It wasn’t Main Street. I didn’t see any demonstrations in the major cities yesterday. Bemoaning this new 100 basis point fed funds rate. Farmers, oil workers, plumbers, contractors, all the working people. They didn’t seem to notice, much less care.

No, it was those folks down on Wall Street who were throwing the conniption fit. They were the ones who were so upset.

You see in one move, the Fed had turned all of Wall Street’s models upside down. Their investment models are built on a “zero” for the cost of capital. And they must now be re-programmed. Carrying cost has come back into the equation, and the Street doesn’t like it one bit.

For the first time since the Great Financial Crisis of 2008, they will have to put a line item for interest expense on their balance sheet. The agony.

But there is one other dimension to Wall Street’s Tantrum. And that is an opportunity to get back at those Fed decision-makers.

No one likes to make a hard and potentially unpopular decision. But that’s just what the Fed did on Wednesday. Jerome Powell and the rest no doubt knew, that they weren’t delivering the good news. But the magnitude of the Street’s reaction was likely a surprise even to them.

And just perhaps that was Wall Street’s Point. Put the Fed in a position where they’ll think twice before raising rates again.

Because make no mistake, the one player in this drawn-out drama, that wants zero interest forever is the Street. Funds, traders, and brokers are united in their desire to push rates down for as long as possible.

After all real interest rates ruin their returns, drive up their expenses and cut deeply into their income.

So what a few hundred points in the Dow? If we can make our point, that the Fed is out of line.

Yesterday showed that it’s going to be a long, long way back to normal for this economy.

David

PS

Leading off the overnight economic reports, the Food and Agriculture Organization of the United Nations is reporting a slight easing in overall Ag prices for April. With cereal prices slightly lower in April. However record high prices are continuing in Dairy, Meat, and Sugar Prices for April.

Indicating that we’re not out of this food crisis yet.

Interesting Purchasing Managers Report out of Russia. After weathering the full impact of the Sanctions in March. Russia looks to be making its way back from the US-imposed trading restrictions.

Apparently, Russia is finding ways to work around the US limits. Although still in retraction, April Purchasing Managers increased their spending by 15% over that disastrous March.

Big day for labor reports, today. The headline news will, no doubt be the unemployment rate. Wall Street believes that unemployment will fall to just 3.5%. If that turns out to be the case, that would match the level achieved back in Early 2020 just before the Economic Lockdown hit.

But to me, the really interesting labor number will be the Participation Rate. That’s the number of eligible workers, who are actually employed. And here we will likely see a slightly different story.

Currently, the Participation Rate stands at just under 62 1/2%. That’s a full percentage point below, where we were before the Pandemic. And represents over a million and a half workers, still not back to work.

That’s an awful lot of people still on the sidelines. And there’s more to this part of the story than meets the eye.

My gut tells me that this is a health issue. Either they are too ill, or too afraid of becoming ill, to return to work. Just a hunch, we’ll have to see how this plays out. But no matter how you slice this, we have many many people who simply are not working.

In earnings so far, a couple of insurance companies reporting. Cigna is unchanged on their results, while Dutch Insurance Company ING is trading down almost 3% at the moment. Also trading unchanged on their results is Ichan Enterprises, the investment vehicle for Carl Ichan.

A little later this morning we should see results from communications companies: Liberty Broadband, and Ubiquity. And then the Dish Network. All expected to report this morning.

And that’s the ValueSide for this Friday, May 6.

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David Reavill

David Reavill writer + finance +iconoclast + hiker + Pennsylvania #valueside daily podcast + medium + meditate valueside.com/links