So let's say Jay Powell raises rates. Isn't that the goal of so many commentators, news makers, hedge fund and money managers?
What happens? It's time to talk about cycles and what will occur if he decides that inflation isn't transitory and he gives up the good fight to keep rates low in order to put more people to work. After all he knows we can get to almost half in the percent of the current unemployed number and not be inflationary because it wasn't under President Trump. He knows that we could cut the percent of minority employment in half from about 10% to about 5% if he keeps the pedal to the metal because it can and has been done.
The first thing that happens is the same people who have hectored him before hector him again, perhaps even louder.
The second thing that happens is the long rates go down while he raises the short rates because demand will go lower.
The third thing is we will get an inverted yield curve or thereabouts after he listens to the jackals who only know one thing: raising rates is the only thing that will save civil society.
The fourth thing? More rate hikes, At that point we should be predicting a recession, which may be the goal rich people need to preserve their wealth and working poor worry or lose their jobs while it gets easier to put dinner on the table as inflation recedes.
Fifth, unemployment quickly reaches 7-8%. The government is too paralyzed between extremist factions.
Sixth, the cycle starts over again.
What's the alternative to this cycle of pain? We let "transitory" play out.
How is that done?
Let's look at the root causes of inflation. First there is mineral inflation. We are running out of copper. But at some point the gold mines will start putting out more copper as it is a byproduct. The junk pickers will start paying Waste Management (WM) for copper. China slows its ordering, as they are the biggest buyers and their economy is already cooling.
Second, we drop the tariffs on Canadian lumber, which at last brings the price down. At that point American companies build new plants because they sense that they can still get price.
Third, the plastic plants that were choked by Winter Storm Uri, something that is rarely talked about, re-start and prices plummet.
Fourth, farmers get all the farm equipment they need and they start planting like mad just as Chinese tensions get so bad they switch to buying all Brazil even as it causes prices to rise.
Fifth, the Permian drillers add a million barrels a day which sends oil tumbling.
Sixth, Taiwan Semi (TSM) switches from emphasizing DRAMs and Flash, where prices are crashing because of the end of the work-at-home craze, and start supplying auto chips at high prices until the automakers catch up to demand.
Seventh, the subsiding of the pandemic ends the trend of homes that are far away from urban cities because it's too far to go from home to the central office.
Eight, steel mills with spare capacity, like Cleveland-Cliffs (CLF) and U.S. Steel (X) add capacity while we become less careful about Chinese dumping through other countries because it won't be enforced as well as it was under Trump. There is no Peter Navarro in this administration.
Nine, appliances and other products that need metal go down as homebuilding slows. So even though prices are going down, fewer buyers create a glut.
Ten, tech displaces expensive goods with disruptive technologies putting further downward pressure on goods and services.
A soft landing is achieved and rates are suddenly right to be as low as they are.
We marvel at what could have been happened if Powell had listened to the inflationists.
That's actually how a cycle occurs. That's why Powell is so stubborn. Because he is right to be so.