Because the two-day rally that ends last week is significant

Let’s say you wanted to design a program to lower inflation. Wouldn’t you do exactly what Federal Reserve Chairman Jerome Powell is doing? You would aggressively raise rates and I challenge you to say that he is not doing just that. You would ignore positive numbers like the weak consumer price index printed last week by sending Chris Waller – one of the more aggressive Fed governors – last weekend saying that interest rate hikes are far from over. You would not claim any wins, including the collapse of cryptocurrency exchange FTX, which filed for bankruptcy on Friday. You would remain silent, allowing investors to expect another 75 basis point hike, especially if retail sales this week exceed expectations.

There are many ways to measure a Fed boss. Most people who comment loudly and viscerally against the Fed tend to be rich people who want their wealth preserved, but somehow actually seem altruistic. Or people in the media see them as such because they are such highly valued bookings. This is probably why they are appreciated in the eyes of viewers.

The old me would say, “What a bunch of selfish bastards.” The new me simply says, “I know where they come from, but they are reckless.”

But let’s use this view as a litmus test. You must ask yourself where are all the rich punishers? Do they realize that Powell is tougher than they thought? I think so.

Their silence is stronger than their protests. Powell is the real deal and it’s not done until it softens our economy, shrinks our wallets, lowers our purchasing power, lowers our wages, and makes our assets cheaper. The good news so far: it’s doing all of this. The extraordinary news? It’s not hurting corporate earnings in the process. They are shining.

Consider: Last Thursday and Friday they were consecutive winners, which is very rare in this one-year bear market. If you bought at market highs on Thursday, you are still up. I can count on one hand how many times this has happened since the peak.

Could it be as significant as many believe?

This is a tough question, because in order for the Fed to check all of its boxes, Powell needs wages to stabilize and this has not happened. He needs to see the weakness of the IPC beyond the handful of line items that have softened things up in last week’s reading. Above all, he needs to see our purchasing power diminished and, ultimately, we’re not there yet.

But let me throw you a weird curveball. An integral part of reducing spending power is speculation. Speculators spend too much because it is in their nature to borrow too much. What do we think then of the cryptocurrency collapse? How much money is really lost with cryptocurrencies? How big are the losses? I’m so sick of the nonsense of the Lehman moment (the collapse of Lehman Brothers in 2008 was the key moment of the 2008 subprime mortgage crisis). I don’t even like comparisons with the fall of Enron in 2001. As my late mother would say, comparisons are hateful: if she lived longer, she would say irrelevant.

What matters is that financial cataclysms such as the downfall of FTX CEO Sam Bankman-Fried cause people to re-evaluate wealth and spend less – and I don’t just mean those who have actually lost and will lose far more money in these often useless cryptocurrencies. .

Take it a step further: Another unknown is the amount of money invested in FAANG / M (Facebook, Apple, Amazon, Netflix, Google, Microsoft). If you’re in the S&P 500, you definitely feel punished, but if you’re primarily in FAANG / M, you feel broke.

Why is this all important? Because the Fed would ideally want to waste time as supply chains become more efficient, which we are seeing with reduced logistics costs. It would certainly help, however, if we slowed down spending as a nation. We need both more goods coming to market and fewer goods being sold. Any excess will cause both lower prices and layoffs.

Does it matter if the layoffs are largely concentrated in something tech, including fintech and real estate tech and retail tech?

I used to think these sectors were too small to make a difference. You would need mass layoffs in retail, automobiles, housing, you name it, anything but the insatiable healthcare sector.

I’m not so sure now. Perhaps the Silicon Valley layoffs have a bigger impact on the economy than we thought. Just as technology has become a larger part of the S&P, it has also become a larger part of the economy. Sure, it’s not nationwide, but it tends to be concentrated only in Northern California and Seattle. But the layoffs will be in the tendrils that are not in those areas.

Anything that reduces the speed of spending, coupled with the reduced price of logistics, could lead to lower prices and wages, which should result in slower and smaller rate hikes. This is why the 2-year Treasury yield so struggles to stay above 4.5%.

I don’t mean we’re off the hook when Fed officials say we’re right in the woods. I mean Thursday and Friday seemed significant to me because they were actually based on weaker numbers that seemed unassailable and yet, at the same time, did not portend shortages of earnings.

Of course, it seems ridiculous that we could go through the whole process with huge increases in earnings. But we’ve seen the hottest sectors of the economy – technology and the internet – turn out to be far more vulnerable than we thought. It’s amazing how much Meta platforms (HALF), Alphabet (GOOGL) and also Amazon (AMZN) depend on advertising for their revenue growth and this goes against the trend as retailers feel the pinch of the Fed. Microsoft (MSFT) heard the latest PC Armageddon. Advanced microdevices (AMD) and Nvidia (NVDA) have been hit by the undeniable weakness in games, although gaming companies deny the weakness.

Netflix (NFLX) is making a comeback, but it’s never been this great. Apple (AAPL) is in there, even if it seems impossible that it will last. But you know my feeling about Apple: own it, don’t trade it.

I’m not including the hundreds of other tech stocks that have collapsed. But if I did, the decline can only be considered seismic.

Which leads to a logical question: What if technology of all kinds and cryptocurrencies turned out to be bigger than we think? What if they could cause the slowdown we need to keep the Fed at bay? Do we really need old-line companies to miss their numbers to see an end to tightening? Perhaps the voracious spending from these hot sectors cools as the logistics nightmare ends. It might be enough to make us wonder if we are no further ahead in the process of breaking out of inflation than we thought.

As I think about what to say at Thursday’s monthly meeting, remember that we will have some truly amazing retail sales data to help solve the dilemma. The best that can be said, though, is that the two days remaining until the end of last week seem significant, especially in light of the FTX crash.

Those two days seem to mean that the Fed is taking a break. Although I’d say it’s a breakup of his own making.

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