Here comes the test. This stock market rallied on two prongs: Jay Powell getting more realistic about the world's woes and their impact on our economy, and the runup in the price of oil -- which signaled, bizarrely, to a potential pick-up in world growth because of the resumption in trade talks with China.
Now oil is backing off and Jay Powell gets a chance to take back the things he said that soothed the market, during a Q&A session at the Economic Club in Washington.
Both could really roil a very overbought market, a consequence of the unexpected, sharp rebound we had when oil bounced off of $45 a couple of times and Powell decided to factor in more negatives than he had when he was blinded by the strong employment reports we have had.
I think the market may not be able to withstand anything negative from Powell on a day when oil is down, simply because there aren't enough positives coming out of the China talks, other than some nice words from the Chinese -- and some bizarre re-visit of the North Korean situation from the tone-deaf Chinese, who simply do not seem to realize that our country is not fooling around with idle talk that will only amount to a hill of soybeans.
I don't like overbought markets, and as much as I want to trust Jay Powell, there are still way too many media types who refuse to get their hands dirty with the actual economy and just keep saying how fabulous things are.
What are they missing? What the companies are saying. Sure, you can read the KB Homes (KBH) and Lennar (LEN) headlines about how there might be a pick-up in sales in the last few weeks. But the last few months have led to incentives, and the last few weeks have given us some mortgage rate pullbacks -- and yet the buyers aren't beating down the doors. I know, I know, it is not an important selling season right now. But remember, you are comparing against a not-important-selling-season from last year, so let's give that non-rigorous thinking a break.
Sure, we got some good numbers out of Costco (COST) and Bed Bath & Beyond (BBBY) , but Costco stands for price deflation and Bed Bath is simply deteriorating less slowly than we thought -- not a reason to buy, but not a reason to go short, either, which has been the only way to play this monster for the last four years.
In fact, I do want to examine these two industries, housing and retail, through the prisms we have just been given: Bed Bath and Costco, as well as Lennar and KB Homes.
Bed Bath's stock stood at $80 four years ago, with a $13 billion market cap and $11 billion in sales. Now it has $12.4 billion in sales and its stock is in the low-teens with a market capitalization of $1.6 billion.
When you think about the U.S. economy, you must think about what has happened here. The average American is moving either on line, or to outfits like Costco -- which put up 7.5% comps for the month of December -- and getting away from what is now considered to be the more full-price and less convenient Bed Bath & Beyond, which uses couponing to snare traffic.
The truth is, though, is that coupons don't bring the price down to the Amazon (AMZN) level and there is nothing much that is perishable at a Bed Bath, so you don't need to drive there every day to pick up groceries.
That has put the 65,000 employees at risk of store closings, as the nation is overstored and the on-line threat keeps materializing, while the brick and mortar winners are low cost providers like the aforementioned Costco, Walmart (WMT) , TJX (TJX) and Burlington Stores (BURL) , the chains the buyers and investors keep flocking to.
So what you have in retail, using this allegory, is a store chain like the formerly well-managed Bed Bath -- this is NO Sears (SHLD) -- just not being able to compete, so it fights for survival. It might be able to do so, because Babies R Us went under and because, despite its ridiculous, wasteful buyback -- the company had 250 million shares seven years ago, when its stock was about $73 and now it has 133 million -- it still has $1 billion in cash, and this is a $1.6 billion company.
But the main thing it has to do is compete on price by driving costs relentlessly lower. It needs to give the consumer a better bargain -- which means, in many cases, an expansion of free shipping thresholds -- they took theirs to $39 from $29.
That puts pricing deflation in the system. You have to be deflationary to play with Costco, Walmart, Amazon and TJX.
At the same time, it has to automate as much as possible and use cheaper labor where it can -- the company called out doing more of its technology work out of India. That puts downward pressure on U.S. employee wages.
In the meantime, the company is now actively engaging in some rent reduction arrangements; that puts downward pressure on commercial construction.
It's a gigantic microcosm of why there is far more deflation in the system than the Phillips curve model -- that the Fed, I believe, is actually still using in some form of another -- would indicate. It is why I keep stressing the micro homework that must be done if you are Powell and Co. Bed Bath is a living, breathing example of a well-executing company that is being felled by omni-channel forces, as opposed to a JC Penney (JCP) or a Sears, which lack raison d'etre and are in a Huis Clos -- no exit -- situation, to belabor ridiculous French clichés.
Now, shifting for one moment to another battle, one that has nothing to do with the digitized economy but everything to do with Jay Powell: housing. If you looked at the stocks you would think that housing has come roaring back.
No, it hasn't. What has happened, though, is that because rates have come down and because sales have been bad, there has been, at last, price-cutting in the system. The affordability factor is getting better.
If you are Jay Powell, that's exactly what you wanted to happen. Housing prices had moved up too quickly. Mortgage rates and the collapse of lumber ended that.
Now, it is possible that if Powell decides to look at the rally in the stocks there could be a very weird reverse feedback loop. You don't want his 27-year-old researchers to say, "Hey Chief, Lennar and KB Homes are rallying, we should raise rates."
We want the whipper-snappers to say "Chief, the stocks are rallying on hopes that you mean what you said, because the price of housing is coming down and mortgages rates are coming down, so maybe we have won and we should just wait and see."
We get that kind of chatter and we will be okay.
The important thing to remember through all of this, though, is just because employment is robust doesn't mean there is strength. Retail sales are spotty, promotions are back and store closings will exceed store openings this year. Housing stocks are up, but the average selling prices are coming down.
The Fed should be struggling to understand why their models don't work anymore, not trying to press their bet that they ultimately will. They should be trying to understand how many enterprises are hiring -- the companies I am seeing out here aren't, in order to cut costs to keep up with Amazon and Walmart. They should be readying themselves for the deluge of layoffs that are about to hit retail now that Christmas is over.
They should be recognizing that there is deflation throughout the system.
And then they can breathe a little more easily knowing that they are winning, not losing, the war against a tapering economy, with lower inflation than they ever expected that can be restarted if they just say and do nothing for the duration.