These days, we start each session wondering which is a bigger problem for this market, the Fed or China.
Yesterday, in a wide-raging interview with the Washington Post, President Trump set us straight: "I think the Fed is a much bigger problem than China."
Because "China wants to make a deal very badly."
And because the Fed is not being accommodative, like every other major country's central banks and therefore he isn't "even a little bit happy with my selection of Jay, not even a little bit."
Well, there you have it. Ahead of a huge speech in New York by Jay Powell we learn that he's at fault for any weakness in the economy, as well as the precipitous declines in the stock market and let's throw in GM's (GM) tone deaf "restructuring" while we are at it.
You know what I like about the President weighing in on the debate? I like his clarity: He's doing everything right and everyone else is doing everything wrong.
In truth, of course, like everything else in Washington, it is a little more murky than Trump says.
First, the Fed's worried about precisely what Trump is most proud of: Full employment. The Fed believes that there is such tightness in the labor force that we are going to have wage inflation in 2019.
This is not easily dismissed. Yesterday Greg Hayes, the CEO of United Technologies (UTX) , talked about the need to hire 35,000 workers over the next five years and it is getting harder and harder to find them.
Of course, there are only two answers to United Technologies' hiring problems: one, pay more or two, go to countries where workers are more plentiful. The president has made it pretty clear that if you do number two you will be in his crosshairs. So he has to pay more... unless the Fed slows the economy and it will be easier to find more workers for the jobs.
How is that possible? How do rate hikes create more workers? I think it is zero sum. You take up rates and perhaps GE (GE) becomes less competitive because of its miserable balance sheet -- and you can hire workers that would have otherwise gone there. That's about all I could think that could solve the problem, unless you want to put everyone through school -- something that United Technologies has done perhaps more than any other company, with its scholarship retention program.
But I digress. Powell's view and Trump's view at this moment are totally at odds with each other and the only way for Powell to "solve" this is to acknowledge the one thing Trump won't: The actual weakness in the economy,
There are press reports that I have heard that indicate that the homework the Fed is doing is terrific and they know everything about what's happening in the economy. Wouldn't that be grand? Wouldn't it be great to know that Powell understood the unfolding weakness "underneath" in the economy when he made his statements about the economy being white hot? Wouldn't it be terrific if Powell had his minions tell the press not to worry about the weakness?
Now I think that Powell might be getting bailed out by lower energy prices. But he's got to worry about man made inflation caused by tariffs and he has to be concerned about fiscal stimulus running out just when he's putting through a tighter money, Fed fund raising policy. Will lower oil offset those increases? Maybe. He doesn't know.
Trump says he knows. He says his gut tells him the Chinese are weak and there will be a deal that will avert the 10% tariffs going to 25%. He has told people that he's not worried because the Chinese stock market is weak. Maybe he knows that the Chinese allowed United Technologies to buy Rockwell Collins and that was the sign that he needs that the Chinese are capitulating.
No matter what, I am going to say the President's got it partially wrong: The weakness in the stock market is a reflection of BOTH worries about a decline in trade and higher prices for the $350 billion odd imports from China as well as higher prices for money.
Both, I believe, are tightening forces that will allow Powell to say "one and wait," which does solve everyone's problems, even if the China talks fail.
That's why this week's so crucial. If the Fed is less of a problem and China is less of a problem we can go higher. If both are problems we go lower. It's binary. And with binary issues comes a level of risk we are not used to.
At least both problems are man made and can be fixed. Powell can slow the rate hikes, the president can slow the 25% tariff while America moves its business from China to other countries. That's nirvana. That could be the end of the bear market in all but the recession stocks.
It's a "thread the needle" story. It can happen. But not if Trump and Powell aren't cognizant that the issues are both interest rates AND China. Otherwise, the bear continues to romp and we are the worse for it in the stock market -- even as China's market is, too.