Quote of the WeekJ

“Without inspiration the best powers of the mind remain dormant. There is a fuel in us which needs to be ignited with sparks.” – Johann Gottfried Von Herder

Tech Corner

 Last week was a really good week for the markets. The Dow was up +3.0%, the S&P 500 was up +4.3%, and the Nasdaq was up +4.7%. The markets are declining a little bit so far this week as of Tuesday. Some people are saying we have reached the stock market bottom and the sky is blue and the weather is great, thus we are headed for smooth sailing going forward. Being an old Navy man there is a saying, “Red sky in the morning, sailor take warning, red sky at night, sailor’s delight”. We shall see, but the morning sky is red and there is a storm coming. Can someone say this was a “Bear market bounce”.

The Fed has raised interest rates 3/4 of a percent into a declining economy which never has a happy ending. Plus, the Gross Domestic Product (GDP) came in at a -0.9% for the second quarter in a row which is the common definition of a recession.

I know that sometimes I can get a little nerdy on the economy, but follow me on these two economic issues.

First, new orders of goods just came in at a 27 month low. Just take a look at the recent reporting by large consumer retailers. They have ordered too much stuff to sell to customers just when demand is falling as customers tighten their belts due to inflation rising. Across the economy inventories are at a 38 year high. This is going to be great for the Holiday Season because these large retailers will have to deeply discount their inventory to get the goods off the shelf. This all means that the companies that produce the goods will be selling less and if they sell less, their profits will decline which will probably lead to their stock declining in value. This will in turn create a negative wealth effect for investors so they will in turn tighten their belts and spend less.

Ok, that’s not so good. But let’s dial down into something most people have never heard about. The report from the Senior Loan Officer’s Survey just came out for the last two weeks in June so it is a little dated. Banks, credit cards, consumer loans, auto loans, and commercial loan standards are being tightened across all these loan sectors. This makes sense if we are headed into an economic slowdown. The lenders want to protect themselves against credit default by only loaning to customers with great credit. If borrowers of lower credit can’t get loans, that is money they can’t spend in the economy to buy that big truck or pay for a new refrigerator.

Because inflation is going up and wage increases are not keeping up, a lot of consumers are using their credit cards just to pay bills and are running up their balances. This use of credit cards to pay bills has spiked in the last few months. If you run up your credit card balance you will be paying high interest charges on the balance which will eventually get out of control to a point where you will spend less.

The same goes for the other forms of credit. If you can’t get the car loan, or a consumer loan, or a commercial loan, that will take demand out of the system. If demand is taken out of the system, companies will sell less of their products which will probably cause their profits to go down, thus their stocks to go down. This is the vicious cycle of a recession. This only ends when the Fed lowers interest rates and puts more money into the system. Unfortunately, the turn around only happens quite a while after the Fed eases interest rates and puts more money into the system. Right now they are doing just the opposite by raising interest rates and taking money out of the system which cause the economy to decline.

So the Fed is caught between a rock and a hard place. If they raise interest rates and take money out of the system to lower inflation they can kill the economy. If they lower interest rates and put  money into the system they take the risk of high inflation going forward. They of course want to have a Goldilocks’s “just right” result of lowering inflation and not killing the economy. My opinion is that they should have started raising interest rates and taking money out of the system last year when the economy was expanding. We shall see, but I don’t like their chances of “sticking the landing”.



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These are Larry Lof’s opinions and not necessarily those of Cambridge, are for informational purposes only and should not be construed or acted upon as individualized investment advice. Past performance is not indicative of future results. Due to our compliance review process, delayed dissemination of this commentary occurs.

The S&P 500 index of stocks compiled by Standard & Poor’s, a division of The McGraw-Hill Companies, Inc. The Index includes a representative sample of 500 leading companies in leading industries of the U.S. economy. Indices mentioned are unmanaged and cannot be invested into directly.

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