Quote of the Week

“It is during our darkest moments that we must focus to see the light.”  – Aristotle

Tech Corner

This week’s letter is a little late by design. I was waiting for the results of the Fed meeting onWednesday. As expected the Fed raised interest rates by 3/4 of a percent. At first the market seemed to like the announcement. I assume the market rallied on the fact that the rise could have been worse. Then, reality set in and the market went into a rather steep decline which is continuing as of (Thursdaytoday.

Last week the stock markets declined sharply giving up the gains of the prior week and then some. The S&P 500 was down -4.73%, the Dow was down -4.11%, and the Nasdaq was down -5.46%.

The Fed is compounding the mistake they made in 2021 by waiting to late to raise rates when the economy was expanding and now they are raising rates at an historic pace to catch up right into the projection of four straight quarters of Quad IV. The only thing worse than yesterday‘s rate hike is that the market is currently expecting  additional rate hikes of 1 3/4% by December, which will only continue to destroy the consumer.

If you don’t believe me, here is what Jerome Powell said during the Jackson Hole conference this year:

“The current high inflation is the product of strong demand and constrained supply and the Fed’s tools work principally on the aggregate demand. None of this diminishes the Federal Reserve’s responsibility to carry our our assigned task of achieving price stability. There is clearly a job to do in moderating demand to better align with supply, we are committed to doing that job.”

The Fed is committed to demand destruction. But when will the Fed stop being hawkish? I personally think it is already too late.

Inflation is still at 1982 levels. But the elements that are causing inflation are not going to be very much effected by raising rates. First, energy is a global commodity and thus the price is set by the global markets. Second, shelter, primarily rents are not going to go down because demand is constant, supply is constrained and people need a place to live. And the third is food. With the war in Ukraine, droughts, and floods the supply of food isn’t going to increase anytime soon. People are always are going to need energy, shelter, and food. So, the demand for those needs is not going to decrease because the Fed is raising interest rates to lower demand. The demand is always there.

So what the Fed is doing by increasing interest rates won’t effect the base causes for inflation: energy, shelter, and food. What will be effected is the demand for consumer goods which make up 70% of our economy. Thus, corporations will sell less, profits will decline, and the stock market will go down because profits will crash. Remember the stock market goes up when times are good and corporate profits are increasing. When corporate profits are declining the stock market goes down.

The Fed is caught between a rock and a hard place. They can’t have that much of an effect on core inflation by raising interest rates, but they need to do something. Unfortunately, they only have one tool in their tool box: raising interest rates. Remember the old saying: “If your only tool is a hammer, you tend to see every problem as a nail.”

 

 

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