The economy can take care of itself. It can whip inflation, but you have to give it a chance. Let's tick off how the Fed physicians should let thy economy heal itself.
First there is oil, a principal source of all sorts of inflation as we keep hearing on every call, including Delta (DAL) today. Crude can and is coming down because the economies around the world are slowing. Emerging markets aren't doing well, we know that and they burn oil above their weight. We don't like how much the Russians are pumping but, interestingly, the Saudis have acceded to the president's wishes and are making up for the mandated shortfall from the Iranian sanctions.
Now we aren't drilling as much as we should and we do have a supply problem because Venezuela is pathetic, Nigeria always seems to be broke, Libya's always at war and Iraq's infrastructure remains behind the times. Mexico could be drilling so much more but doesn't have the money. We could be pumping more but we don't have the pipe from the Permian. It's not optimal but there's enough oil that it doesn't have to go straight to $100 as the economies cool. The Fed can see the self-correction, can't it?
We got a very cool CPI number today which is a reminder that there are offsetting forces to the tariffs and the employment shortage. It makes us feel better about Amazon's (AMZN) salary boost, which, somehow, is considered to be the setter of the minimum wage in this country. I say, hello? You really think a back breaking warehouse job is as easy as a salesperson or logistics person at a department store? Those $15 an hour jobs are awful. You should have to pay more than others.
I do think that retailers are going to have to eat some of the cost of the tariffs and they won't all be passed on to the consumer. That's bullish for the consumer and a welcome antidote to more inflation. Yes, it will squeeze margins. So don't own them if you don't want to.
Now think about what is happening in the residential market. We heard from Barry Sternlicht last night, he's the chief executive officer of Starwood Property Trust (STWD) . He's talking about a peak in high end real estate, where the real inflation has been. That's the market and the 5% mortgages and, in big, overheated markets like San Francisco, Miami and New York, the lack of new money from wealthy Chinese and Russians talking.
Now how about small and medium size businesses and expansion. There is a very limited point of view that wages must go up because of a labor shortage. I would say the shortage is temporary because rates have gone up, too and the raw costs of expansion have made it so it is not economic. Business starts will come down because it makes little sense to expand given how your budget is already being busted. It will take time, just like it will take time to sort out the supply chain and truck driver issuers. But, believe me, it will happen and you don't want to accelerate it, as President Trump has acknowledged when he has said "they know nothing." You don't want to wake up and find out that there are more than 89,000 people laid off, which could be what happens if Sears (SHLD) and Kmart just close their doors on Monday. That's capitalism, sadly, taking care of itself.
We have a stronger dollar which holds down inflation. That matters, too. It's the magic elixir that is often not thought about although Larry Kudlow, the president's chief economic adviser, understands it.
Most important is the deflationary input that is plain as the nose on your face, the markets. First bonds: The ten-year interest rate has stopped going up. Anyone notice? What happens if we have seen the peak of rates? It's possible given the softness I am seeing and how the economy is, to quote Barry Sternlicht, not as strong as it looks.
And now stocks: they have been crushed with the most popular stocks going down the hardest. Part of the strength in this economy is based on the stock market. It has a tremendous wealth effect. It allows people to spend more.
Not now. This sell-off is self-fulfilling. We forget that, we forget history. House down in value. Stocks down in value. Nest egg down in value. That may be the ultimate elixir that Fed Chair Jerome Powell doesn't get, but if it keeps falling he sure will.