Will it be a one-two punch, or will it be a reset?
As quarter after quarter comes in from companies that have seen prices elevated by the cost of ethane because of a freak spike in natural gas prices, or in steel because of the tariffs, or in supply chain and freight because of a dearth of truck drivers, all I can say is that higher interest rates will do nothing to solve any of those problems.
Does the Fed know that, say, Welbilt (WBT) reported a sorry number last night, and this very well-run maker of food product machinery like ranges and griddles and grills won't have as good a year as we thought because of the steel tariffs and freight transportation? Will they check into how Sysco (SYY) missed its quarter and recognize that a lot of it was transportation, warehouse and supply chain issues, as well as increased fuel costs?
What will higher rates do to help that combination? Maybe Fed Chief Jay Powell watched Clorox (CLX) CEO Benno Dorer, when he said, "We're missing about 50,000 truck drivers in this country and that's because the job of a truck driver was less attractive today than it was years ago -- and as a result, for every available truck there are seven available loads and that's two to three times higher than years ago, and that all puts pressure on the supply chain."
Every day, we get these reports -- and everyday I get the sense that there are actual living, breathing non-thinking people who believe that somehow these same situations, ones that have bedeviled almost every single manufacturer or goods, both capital and consumer, will be cured by higher rates. That's the one-two punch that I so fear.
In reality, they will cure themselves and we will simply get a reset of expectations -- which is exactly what has happened with Clorox.
Even with rates kept steady here, managers will stop expanding their operations for fear that business is peaking. They will cut back when price increases don't stick and goods pile up unsold.
If the Fed's goal is to accelerate that punch in the gut with a second one directed by them, then they will win the battle, but most certainly lose the economic war, especially with tariffs just making things worse in 2019..
What I am actually hoping for at this time is that we just simply get to cycle through the increases without any further push from the Fed. The idea that there will be any deal on trade when we are trying to contain Chinese expansionism paid for by our own consumers does smack more of fantasy than of fact, so Jay Powell and company should take comfort that the trade war with China will slow down our economy in its own right, the same way a tax increase would impede growth.
I think the goal of any policy maker in this country is to try to figure out how to get the supply chain working again in an anti-inflationary way. If the trucking companies can't find enough drivers, let's find out if it is because they aren't willing to pay them or we simply can't find them. Let's find people who want to work behind the wheel and train them to do it. We need truck driving instructors, perhaps from the military.
Fifty thousand truckers versus fifty basis points of Fed funds? Which is a more-efficient way of bringing prices down?
And then if we want to get enough oil to market, for heaven's sakes' lets have a FERC that encourages pipeline construction, instead of this one which has -- oddly, given who is president -- discouraged construction. We need that Permian oil and gas to get to the market where it is needed. It's nonsense that we should have such high ethane costs -- a product based on natural gas -- which then reverberate through the consumer packaged goods sector, when we have the cheapest and most plentiful natural gas supply in the world.
But this supposedly business-savvy government isn't thinking about any of these nitty gritty, non-polarizing issues. I am hoping after the endless campaigning is finished, the President or the House or the Senate or the Cabinet -- or someone, anyone -- will consider the issues I just addressed.
But I know they most likely won't, because these issues are based on common sense, and that is the commodity most in short supply in this country.