Powell’s Arrogance & Ignorance to Continue – Here Comes the Cut

What to Expect Today

Let’s get the worst kept secret out of the way. The FOMC is going to cut interest rates today by 1/4%. I don’t know of anyone who doesn’t believe that short-term rates are going down today, regardless of whether they agree or not. The big question is going to be what Powell says after that. Is this an “insurance” cut as in one and done? Or, is it the beginning of a rate cut cycle like we saw in 2007 and 2001? The last two cutting cycles began with 1/2% cuts and as we know, ended very poorly for the economy and especially the financial markets. I would be very surprised if the Fed cut by 1/2% today and frankly, a little more than concerned. Today’s cut is most similar to July 1995 when stocks were also at or close to all-time highs, but the economy then was stronger and inflation and unemployment were much higher.

Model for the Day

As with every Fed statement day, 90% of the time stocks stay in a plus or minus .50% range until 2pm before the fireworks take place. I fully expect that to be the case today. Besides that, there is also a strong long-term trend for stocks to close the day higher, although that is not as strong as it used to be. Additionally, with stocks near all-time highs and significant upside progress over the past two months, the bulls have even less dry powder than normal.

Given Apple’s earnings beat last night and other positive reports, I can certainly make the case that the easy money will be made from last night’s close to 10:00 am today. Finally, although not conforming to any special Fed day trend, I am certainly aware that any short-term rally may be sold, either from Jay Powell’s comments or just routine, sell the news, profit taking.

Jay Powell’s Arrogance & Ignorance

As I already mentioned, everyone knows what the Fed is going to do at 2:00 pm today. That’s not in debate. And right now, the market is pricing in at least another two rate cuts. Long time readers know that I have been very critical of the Fed, more with Yellen and Powell than Bernanke although Big Ben did make perhaps the single greatest imbecilic comment in 2007 when he said the sub prime mortgage crisis was “contained” and there would be “no contagion”. It would be impossible to have been any more wrong than that and on an epic scale.

Anyway, I think the Jay Powell led Fed is among the worst groups since 1988 when I entered the business. Greenspan may have been the worst Fed chair since Arthur Burns in the 1970s but Powell is certainly working on his legacy and it’s not an enviable one.

For 6 years I have pounded the table that raising interest rates AND selling assets which is now being referred to as quantitative tightening is the mistake of all mistakes. Selling assets is akin to also hiking rates as it reduces liquidity and tightens financial conditions. Janet Yellen should have chosen one or the other. Pick your poison. Instead, she forged ahead with both.

Jay Powell continued on that path except he, in a grand stroke of additional arrogance, decided that rates should go up at a quicker pace. Arrogance and ignorance are among the two worst character traits and I think Powell has them both. We all saw what happened last December when the Fed added that one additional rate hike and did not temper the asset sales. The global financial markets collapsed like hadn’t been seen since the Great Depression.

The Fed – Savior of the Financial Markets

Now, you can argue that it’s not the Fed’s job to appease the financial markets and you would technically be correct. The Fed has a dual mandate from Congress. Price stability (inflation) and maximum employment. However, the Fed, for the most part, usually follows what the markets want and have priced in. I say “usually” because there have been a few times when the Fed has gone off book.

Remember, the Fed doesn’t want to upset the financial markets. These markets are absolutely vital the U.S. and global economies. And despite what you may hear from Lizzie Warren and Bernie Sanders, a healthy and vibrant Wall Street community is an absolute necessity to a growing economy, even though that same group is prone to bouts of greed and bad behavior which can have a periodic and significant detrimental impact on the economy (see chapter on how the financial crisis began in 2007 and 1929).

When politicians from both sides talk about how Wall Street “wrecked” the economy, they always forget how many direct and indirect jobs were created from Wall Street’s work. The problem is that we (the U.S.) always seems to reward bad behavior and don’t punish it. And so many politicians continue to pat themselves on the back for the Dodd-Frank piece of legislation which did good by increasing capital standards but failed miserably by declaring victory that the days of Wall Street bailouts were over. Not a chance.

When push comes to shove, the political will is never there to let a Morgan Stanley or a Goldman potentially take down the economy with out. In real time in 2008, my thesis was that AIG should not have been saved which would have sent Goldman down with it. I thought letting more institutions be punished would have caused more short-term pain, but the free market would picked up the slack and the economy would have seen a much, much better recovery than it did., A topic for a different day.

Dual Mandate

As I already mentioned above, the fed has a dual mandate from Congress. Regardless of what President Trump believes or wants, the Fed’s instructions are from Congress. When we look at the Fed’s dual mandate, Congress essentially directs the Fed to keep inflation manageable and seek to have the country fully employed.

Right now, unemployment is at or near record lows with minority unemployment also at or near the lowest levels since records began. That is maximum employment, a point where the Fed would normally worry about a labor shortage and a spike in wages. While wages are finally rising, we are not seeing a squeeze and nothing like McDonalds paying signing bonuses like we saw years ago. With half of the Fed’s mandate pointing towards a rate hike, it’s makes me wonder.

Looking at price stability (inflation), we see the same trend that has been in place for more than a decade; inflation cannot seem to get going. While many people are familiar with the Consumer Price Index, the chart below is a much better gauge and you can Google if you want more info about it. The blue line excludes food and energy and this CENTURY you can’t find a single year of 3%. The very random Fed target of 2% has barely been met since the financial crisis.

So, the second half of the dual mandate is certainly amenable to a rate cut. You have the dual mandate at odds. In my world, that would mean a neutral stance by the Fed. Leave rates unchanged and stop selling assets. Let things be for now.

Jay Powell & Company at Odds.

Jay Powell and the majority of the voting members of the Fed want to cut interest rates by 1/4% or 1/2%. There is a minority faction that wants to leave rates alone. Powell has spoken about an “insurance” rate cut. He discussed weakening economies in Europe and Asia that eventually could impact the U.S. I just want to know where in the dual mandate it says that the Fed should worry about China and Europe. The rest of the world is now seeking to loosen financial conditions so now Powell wants to follow them.

The markets are expecting 1/4% cut. One of the many great charts and work that Tom McClellan does has to do with forecasting a rate move based on the two-year Treasury Note. Below is a chart of that instrument overlayed with the Federal Funds Rate which is the actual interest rate the Fed controls. Tom argues that all the Fed needs to do is follow the two-year Note instead of meeting and debating all the time. His analysis certainly has merit.

When the solid black line is below the colored line, the Fed is allowing easy financial conditions. The reverse is true when it’s above the colored line. Right now, the two-year Note (the market) is telling the Fed to cut rates. While I believe it’s premature, the market does not.

What I Would Do

While I could go on and on and on as I sometimes tend to do, I am going to wrap this up by saying that Powell is going to hide behind tariffs and China as the reason to cut rates today. Although I absolutely do not think he will intend to poke the President, I do think that labeling tariffs as the potential economic weakness culprit will certainly tweak Donald Trump.

My own economic forecast remains unchanged since I first offered it in late 2017. I think the U.S. will experience a very mild recession beginning before the 2020 election. Although there are so many doom and gloomers who forecast something much more ominous, it’s almost impossible with the banks in such great shape, literally sitting on more than two trillion dollars in cash. And if you want to know what I would do instead of cutting rates, I would stop paying the banks to keep their excess reserves at the Fed. This would force them put some money to work in the economy.

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Post Fed – A Rate Cut – SERIOUSLY?!?!

Jay Powell & Company gave the markets exactly what they wanted on Wednesday. They threaded the needle which is no easy feat. As someone who has been very critical of the Fed, I have to give them props for not upsetting the apple cart. The problem now is that markets are pricing in a 100% chance of a interest rate cut in July which doesn’t sit well with me. If stocks continue rallying, how can the Fed really give it more juice?

The Fed has now gone from being concerned about inflation to trying to stimulate inflation, all in 6 months. If the June employment report due out on July 5th is not weak, how could the Fed cut rates with unemployment below 4%? I guess if trade talks with China fail at the end of next week, the cover will be that the FOMC will cut in July in anticipation of slower growth because of the tariffs. Trump and Xi are supposed to meet at the end of the month at the G20 in Japan. The June employment report will be released on July 5. Like everything else, we will watch and see what happens.


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Insurance Rate Cut, Oasis in a Recessionary Desert, Dow 30,000

Here we go. We went a whole two FOMC meetings without the media labeling them something like, “the most important Fed meeting ever”. That was a whole 12 week respite. But fear not, there is widespread labeling today that there has never been a more important FOMC meeting than the one ending today at 2:00 pm. Before I begin to unpack today and what lies ahead, I want to extend a thank you for the support I have received since my accident. I feel great and I am healing way ahead of schedule. It’s been nothing short of miraculous. I am one lucky guy.

Model for the Day

As with every Fed statement day, 90% of the time stocks stay in a plus or minus .50% range until 2pm before the fireworks take place. I fully expect that to be the case today. Besides that, there is also a strong trend for stocks to close the day higher. Finally, the other strong trend is to see stocks surge between 2 pm and 4 pm. Given the strong rally in stocks over the last 5 and 10 days, the trends should be somewhat muted.

No Rate Hike Today. July on the Table

The FOMC is not cutting interest rates today. I know the media has played up the possibility, but the market has only priced in a 20% chance of a cut and few are really expecting any action. Shockingly, at least to me, the market has priced in an 80% chance of a rate cut at the end of July. Right now, I don’t see it.

While the Fed supposedly doesn’t use the stock market as an interest rate guide, the stock market is now just about 1% from all-time highs, certainly not in need of rescue like it did in December. Economic data has been mixed. The most recent employment report was weak, but retail sales have had a bit of a resurgence. Housing continues its struggle from what was (no longer) higher mortgage rates and the capping of state and local tax (SALT). However, consumer sentiment and confidence has rallied yet again. The demise of the consumer seems to have been greatly exaggerated, at least so far.

Adding all of the preceding up, I find it very hard to argue for lower interest rates. Now, we all know there is more than just what I mentioned. The FOMC had been raising rates as GDP strengthened. GDP is now tailing off a bit. The FOMC had been concerned about inflation that hasn’t materialized at all in over 10 years. There is no present worry about inflation, either at the core or including “volatile” food and energy.

Europe’s economy is weakening to the point of needing stimulus from the European Central Bank. China’s economy has been severely hurt by U.S. tariffs. Some will argue that the U.S. economy can’t continue as an oasis in an otherwise recessionary desert. If the Fed moves to rate cut alert, it would be doing so purely as insurance and not based on their Congressional mandate of maximum employment and price stability.

What to Expect in the Statement

Overall, it is widely expected that the message from Powell & Co. will be dovish. In other words, the Fed should move the message towards an interest rate cut without actually doing one. As with every FOMC meeting, pundits and the computer algorithms will quickly parse Jay Powell’s statement for material changes from the last meeting. It is widely expected that the FOMC will remove the word “patience” from its statement. Yes, I know. It’s hard to believe that the markets will hang in the balance for the removal of a single word in the statement. Analysts will also quickly turn to the “dot plot”, an anonymous forecast, FOMC member by FOMC member, of where they forecast the Federal Funds Rate to be in the future.

And Then There’s Trump

Everyone knows that this presidency has been different and unique from all others. Regarding the Fed, President Trump has certainly tossed aside all historical norms. Until Trump, the President did not comment about the Fed, its chair or its policies out of respect for its independence and for fear of rattling the global markets. We now know the latter has been debunked. Donald Trump has been a very vocal critic of Jay Powell and the Fed’s policies, even though the President chose Powell to lead the Fed. Frankly, I find it very uncomfortable that the President criticizes Powell and the Fed or even speaks about them at all. I don’t think that’s healthy. But I don’t get a vote in that regard.

Some have wrongly speculated that the last rate hike in 2018 was some sort of payback by Powell and the Fed to Trump. I find that to be absolute nonsense. Why would the body responsible for the economy do intentional harm? They wouldn’t. Lately, there has been talk of Powell being demoted or terminated as chair. I rate that as very unlikely.

The Fed also has to deal with what I have affectionately referred as the Trump Tariff Tantrum. As I have written since day one, no one wins a trade war. Some just lose less. The on again, off again tariff war with mainly China has put the Fed in a difficult position. If all threatened tariffs proceed ahead, then you can certainly make the argument that an insurance rate cut or even two makes perfect sense. If a deal is reached with China, then the economy should see a small bump higher.

Mild Recession Coming by the Election

Whatever happens, one thing is almost a certainly. The Fed will not forecast the next recession.


Because in the history of the Federal Reserve, the Fed has never, ever accurately predicted the next recession. They are perfectly in their incompetence! You could also argue that secretly they really do see problems coming down the road, but could never telegraph that publicly for fear of upsetting the markets. This is the argument I fall on the floor laughing my head off.

The Fed is almost always late. 1995 was the exception and they threaded the needle. For years, I have criticized them for raising rates and selling assets. I thought it would fertilize the landscape for recession. The tax cuts forestalled that, but the next recession is coming, but to be fair, it’s always coming. I continue to believe that a mild recession will begin before the election. For sure, it will be interesting to see if the Fed begins a rate cut cycle and that somehow pushes recession out for years. I don’t have strong confidence, but I will certainly root for that to be the case.

Housing remains very challenging with what was higher mortgage rates, millennial behavior changes and the capping of state and local taxes at $10,000 from the 2017 tax cuts. Credit card and auto delinquencies remain elevated in the face of the good economy. The tariffs are the big question mark. A full-fledged tariff war with a teetering economy could tip us over. The next 17 months into the election are going to be interesting and full of “fun”.

Stocks Set to Burst to New Highs Before Declining

Since the last Fed meeting, the stock market has gone essentially nowhere. In between, we saw a 7% decline and roughly the same rally. Both seem to have been strongly influenced by the Fed and the tariffs to a lesser degree. My long-term message remains unchanged. The bull market is alive and reasonably well. Dow 27,000 should be seen sooner than later with a chance at 30,000 by Q1 2020. Higher stock prices will make it more challenging for the Fed to cut rates.

Over the intermediate-term, I have a small but growing list of concerns that is causing me to shift from buying the dip to selling the rally. Stocks are positioned to see one more burst higher to new highs on the Dow and S&P 500. The NASDAQ 100 may also follow suit, but I doubt the S&P 400 and Russell 2000 will. If we do see that surge to new highs, I think it happens right here. The worst thing for stocks would be a quick push higher post 2 pm today and then a decline with a close near the lows for the day. That could set stocks up for another single digit pullback.

Semiconductors are not leading. Neither are transports. Banks continue to look very appealing to me, but they are not leading yet. Only consumer discretionary is in a leadership position from my key group. High yield bonds are acting well, but they could be stronger, especially of late. Very importantly for the sustainability of the bull market, the New York Stock Exchange Advance/Decline Line which you can see in the second chart below, continues to make new high after new high. Bull markets do not end with behavior like this. There is widespread participation in the rally, even though it’s not perfect, or at least not yet.

With stocks rallying sharply into the FOMC meeting, there is certainly a chance of selling the news or disappointing. There is also a chance that stocks surge and then fall. The only scenario which seems unlikely right here is for stocks to blast off, unabated. That path would definitely catch me off guard. After today concludes, it’s also one road I will need to do work on to figure out how to best navigate.

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