If we go into a severe slowdown, don't go blaming Fed Chief Jerome Powell. We've been saying for more than a month now that he's been way too bullish on the economy and wasn't correctly assessing the risks we are facing. Today he did an about-face, owned up to the changes in the economy, like a great Fed chief that he aspires to be and a magnificent rally ensued.
Now let's understand what Powell did. About two months ago he talked about how rates might need to go up substantially because employment was running so hot. He even discussed the idea that he might have to overshoot on rates to cool things down.
The result? This market went into a breathtaking bear mode, crushing whole sectors as investors accepted it was the end of the growth cycle and the beginning of an economic decline, one mandated by Powell himself.
We spend a huge amount of time talking to executives on my show and the more I talked the more I realized that Jay, a terrific guy, was being a little too exuberant. I hate to admit it but I became a scold going on and on about first a slowdown in housing reminiscent of 2006-2007, then a big decline in car sales, exemplified by the giant layoffs announced by (GM) , then an unrelenting plunge in oil which threatens to bring down the strongest part of the economy, and finally a slowdown in retail sales at the same time that a huge amount of Chinese inventory was pulled through to these companies' warehouses.
In the end I accused the Fed of not doing enough homework, of relying too much on young staffers without ties to business or on anecdotal information about strength or, of course, the only prism that seemed to matter to them, employment, even as there are so many factors that indicated we have seen the peak in hiring just when Powell was most ebullient.
Of course, it didn't help that at the same time the economic outlook was deteriorating, the president talked out of both sides of his mouth, saying that things are red hot yet the Fed is going to wreck things with more rate hikes. Of course, if things are red hot we need rate hikes. I still support one more, in December, to get to neutral, something that Powell seemed to think wasn't near neutral until he did the homework. But if you think Powell didn't' do the homework, don't even consider whatever Trump may have done to be rigorous at all. He's too busy hosting campaign rallies to understand the cracks that have been developing.
Now, I am totally conscious that there is nothing more deadly, nothing less interesting, than prattling on about the Fed. But I felt that if Powell blinked, if he adopted a one and wait strategy rather than sticking by his plan for four rate hikes with a possible overshoot, we would stay in a protracted bear market.
I said that if he changed his mind we would go from bear to bull mode. You want an example? Yesterday I said that in a bear market even the slightest negatives cause endless downturns of the stocks of decent companies.
Today, we got the exact opposite because of Powell. Last night Salesforce.com (CRM) reported a terrific quarter, really a great one and the stock ripped higher, but then it shed most of its points, ahead of what many a Fed observer said would be a continuation of the uber-bullish rap that Powell had adopted at the beginning of October.
With the "adjustment", how's that for a diplomatic reading - we got sent back into bull market mode and not only did we see a remarkable resurgence in the stock of Salesforce, all of the cloud kings exploded higher and given up for dead stocks like Alphabet (GOOGL) , Amazon (AMZN) and Apple (AAPL) , the Triple As that had run out of battery power got recharged. At the same time the transports, the most sensitive to economic news, ignited, too and many of the cyclical stocks that had been given up for dead came back to life.
It was a morphing from ugly duckling to swan, and, to be sure, a white one not the fabled black one the hedge funds are always wringing their hands about.
Now this one was tough to swallow for those who have been yapping endlessly that things are so good more rate hikes are needed. Some would argue even that Powell threw these acolytes under the bus when he changed course today. I am less judgmental: he threw them under a Ford (F) F-150.
But they may still get their chance. Remember, we have two hurdles to get to the bullish promise land. We have checked off the Fed box - it won't be the cause of the gigantic slowdown I feared. Now, though, we have the G-20 and this is a much tougher one.
Here's the scene: Right now the president has said that it looks like he has to take the tariffs on Chinese imports from 10% to 25% because of how little success we have had with getting China to change its evil ways. He is also threatening to slap on tariffs on another $250 billion of imports or more.
We don't know what he is going to do. He may not know what he is going to do.
But my educated guess is that he will say that he is not satisfied with what China is doing and is going to raise the 10% to 25%. However, the olive branch will be that he will hold off on putting the tariffs on the rest of the goods.
Now, personally, I am not a free trader when it comes to China. They play dirty. They have never played by the rules we thought they would after joining the World Trade Organization. It's not easy to try to figure out how to get them to change their ways. In fact, the only way I know is to starve them of our markets so they don't have the money to wage economic war against us.
But if I put my stock hat on I want to see some sort of deal with the Chinese that would make it so we could go down a path where they give in on a lot of trade restrictions and we don't need to go to 25%. I don't think they will do that.
So does the stock market go down on that?
Most likely...unless Trump puts some lipstick on the tariff pig that I haven't thought of, I think that we will have a bit of a hiccup, nothing catastrophic.
Why not something worse than that? Because the most toxic aspect of this stock market is that we have been fighting the Fed all the way.
As of today we are no longer fighting the Fed. I think Jay Powell, after today, is now in the one and wait camp, just where he should be. He's a grown up. Regardless of what the president is saying about him, Powell is a rigorous thinker, a flexible leader and today he may have given this economy and with it the stock market, a new lease on life provided that the president G-20 foray doesn't go beyond a 25% tariff on some goods, and little to none, on others, especially, as we keep saying, on Apple products made there and sold here that impact more investors than any other in the world.