Why the two-day rally to end last week is important

Suppose you want to design a program to lower inflation. Why wouldn’t you do what Federal Reserve Chairman Jerome Powell did? You’re going to raise rates aggressively, and I defy you to say he’s not doing that. You would ignore positive numbers like last week’s weak consumer price index by sending Chris Waller – one of the Fed’s more hawkish governors – this past weekend saying that interest rate hikes are far from over. You will claim no victories whatsoever, including the collapse of the cryptocurrency exchange FTX, which filed for bankruptcy on Friday. You’ll just keep mum, allowing investors to hope for a 75 basis point increase, especially if this week’s retail sales come in above expectations.

There are many ways to measure the head of the Fed. Most of the people who comment vociferously and viscerally against the Fed tend to be rich folks who want their wealth preserved, but somehow it actually comes off as altruistic. Or people in the media think of them as such because they are a precious order. That is why they are esteemed in the eyes of the viewer.

In the past I would have said, “What a bunch of selfish bastards.” I just said, “I know where they’re coming from, but they don’t like it.”

But let’s use this view as a litmus test. You have to wonder where all the rich castigators? Maybe they realized Powell was tougher than they thought? I think so.

Their silence is louder than their protest. Powell is the real deal and he’s not done until he softens our economy, shrinks our portfolios, reduces our purchasing power, reduces our wages, and makes our goods cheaper. The good news so far: He’s doing all of that. Amazing news? He did not disrupt the company’s income in the process. They are shining.

Consider: Last Thursday and Friday were winners again, something very rare in a bear market this year. If you buy at the market high on Thursday, you are still up. I can count on one hand how many times it has happened since the summit.

Can it be as significant as many believe?

That’s a tough question, because in order for the Fed to check all the boxes, Powell needs wages to level and that hasn’t happened yet. He should see weakness in the CPI beyond the handful of line items that softened things in last week’s reading. Most importantly, he needs to see our purchasing power diminish, and we most certainly are not there yet.

But let me throw you a weird curveball. Part and parcel and reduction of spending power is speculation. The speculators overspend because it is in their nature to borrow too much. What do we make of the crypto crisis? How much money is lost in crypto really? How big is the loss? I am so sick of the Lehman nonsense (the collapse of Lehman Brothers in 2008 was a key moment of the 2008 subprime mortgage crisis). I don’t even like to compare it to the fall of Enron in 2001. As my late mother would say, the comparison is odious – if she lives again, she can be said to be irrelevant.

What matters is that financial disasters like the destruction of FTX CEO Sam Bankman-Fried make people reassess their wealth and spend less – and I don’t just mean people who have lost and will lose more money in crypto coins that are often worthless.

Take the next step: another unknown is the amount of money invested in FAANG / M (Facebook, Apple, Amazon, Netflix, Google, Microsoft). If you are in the S&P 500, you will definitely be punished, but if you are mostly in the FAANG/M, you will feel broke.

Why is this all a problem? Because the Fed ideally wants to stall for time while the supply chain becomes more efficient, something we see by lowering logistics costs. It would certainly help, if we slowed down our spending as a nation. We need more goods coming to market and less goods being sold. Any glut will cause both lower prices and layoffs.

Is it a problem if layoffs are generally concentrated in any technology, including fintech and real estate technology and retail technology?

At one time it was thought that these sectors were too small to make a difference. You need mass layoffs in retail, auto, real estate, you name it – everything but the disgruntled health sector.

Now I’m not so sure. Perhaps the Silicon Valley layoffs are having a bigger impact on the economy than expected. Just as technology is becoming a bigger part of the S&P, it is also becoming a bigger part of the economy. Sure, it’s not national, but tends to be concentrated only in Northern California and Seattle. But the layoff will be in the area’s absenteeism.

Anything that reduces the pace of spending, coupled with falling logistics prices, could lead to lower prices and wages – which should lead to slower and smaller increases. That’s why 2-year Treasury yields are having a hard time staying above 4.5%.

I don’t want to say we’re out of the woods when Fed officials say we’re smack in the woods. I would like to say that Thursday and Friday felt important to me because they were actually based on softer numbers that seemed unpredictable and, at the same time, did not indicate a lack of income.

Sure, it seems silly that we can go through this whole process with giant earnings blowups. But we’ve seen the hottest sectors of the economy – technology and the internet – revealed to be more vulnerable than we thought. It’s amazing how much Platform Meta (META), Sundanese script (GOOGL) even Amazon (AMZN) depends on advertising for its revenue growth and is in a tailspin as retailers feel the Fed’s pinch. Microsoft (MSFT) has felt the last of PC Armageddon. Advanced Micro Devices (AMD) and Nvidia (NVDA) has been walloped by an undeniable weakness in the game – even though the game company denies the weakness.

Netflix (NFLX) is coming back, but it’s never been big. apples (AAPL) is hanging in there, even if it seems impossible to hold on. But you know my feeling on Apple: own it, don’t trade it.

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

Which leads to a logical question: What if technology of all kinds and crypto turns out to be bigger than we think? What if they could cause the slowdown that we need to keep the Fed? Do we really need companies that have been long to miss the numbers to see the end of tightening? Perhaps the huge expenditure that comes from these hot sectors will cool down while the logistical nightmare ends. It may be enough to make us wonder if we are not further along in the process of breaking inflation than we thought.

As I think about what to say at Thursday’s monthly meeting, remember that we’ll have some amazing retail sales data to help with the issue. The best that can be said, is that the two days leading up to the end of last week seem to be important – especially given the collapse of FTX.

Those two days seem to say that the Fed is taking a break. Although I would say that the break made itself.

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