So what did you expect? You can continue to have your cake and eat it to? How about you can have a smaller piece of cake and keep eating it?
That's how I felt about what the Federal Reserve did Wednesday when Jay Powell didn't lower the boom on the stock market, he simply acknowledged what we talk about here constantly: Business is really good, getting better and it's terrific, but not terrific enough, because there are still many people unemployed especially African Americans and Hispanics.
So, as the chairman said, the rates need to stay low, but not so low that they drive prices up too much too quickly. A little inflation is a good deal if we get more people hired, especially because inflation expectations might be tampered.
Sometimes commonsense shocks people. The idea that the Fed Chairman is simply going to be oblivious to how strong things are would make him a fool. He's no fool. The idea that he has to determine right now that he needs to do two or three rate hikes is also foolish. It's enough to say, "We've got a real good economy, but we don't know if it will say this hot - but if it does we will take action."
Here's the irony. If Powell had said, "We don't see strength and we are worried about unemployment and things aren't strong and there are no shortages," I don't even know what the heck the market would do, but I know how it would look. It would look like we have an oblivious Fed and that would be awful. But if Powell had said, "OK, let's go, it's too hot, time to taper off buying and raising rates, then he would have been equally as oblivious."
An oblivious Fed is a Fed that ultimately leads to lower stock prices.
This meeting in that sense is a watershed. Powell can take action after this if he wants to. He can taper off bond buying at the next meeting or the next or the next or the next. "We are a ways away" from taking action, he said "but we are making progress."
If you thought we weren't making progress toward full employment, you are genuinely stunned by Wednesday's meeting. That makes you a fool. If you thought we were making too much progress then, you are a hawk that is destined to be hit by a car.
So what does this all mean for stock investors? How do you adjust your portfolio?
First, I don't think you need to do anything. As we said earlier this week when we looked at the work of Larry Williams, the technician I swear by who told us on Monday that we were going down, you know there's going to be more losses ahead. Again, as we said on Monday, if you can be nimble enough, take some action, but be ready to buy stock back that you sold. The technicals say don't buy, don't buy. As base as they are vs. the spots and dots thing that is Fed speak that means little to me, the empirical data says don't make a move to buy yet.
Second, if the Fed isn't about to stifle the economy, but will eventually have to normalize things and raise rates, then you can buy the stocks of companies that are going to have better-than-expected earnings. I know, that sounds so soporific, but the Fed has done nothing except take itself out of the equation within the next six months - that's been assured. The reporters are all trying to get Jay to commit to some silly timetable that would wreck the economy and not stop inflation. Jay's not playing that game. He wants people who make little to make a little more. Hey, there's a sin. He knows there are imbalances in the economy, shortages, because people didn't realize that the pandemic would come to a close so quickly. But, as he said, "there's a big group of unemployed people" and he doesn't want to disenfranchise them to please billionaires and their reporter abettors who think they are so smart and so right all of the time, but have been dead wrong vs. Jay for three years now.
I know there are people out there who want commentators to say, "That's it, it's over, the decline in stocks shows that." I can't play that game, either. A decline in the stock market after the Fed admitting what we all know is the smaller piece of the cake.
Powell knows that demand for goods is very high. That's good. He knows that people are spending without taking down a lot of debt. That's good.
But the most important thing we heard is that the Fed thinks that the things that are causing inflation could slowdown and that he would rather wait and see.
I think there is something here that people don't want to believe. I think Powell believes that it is possible that we could have more people hired, that we could have lower unemployment among Hispanics and African Americans, that we could have spending be strong, but not causing too much inflation. I think Powell believes that we can have some cake and do some eating and that's great. He doesn't want to ban the cake and he doesn't want to let us get obese.
That, again, makes me think just stay the course and use the decline to buy the stock of high quality stocks, especially the industrials, because the Fed isn't declaring victory, victory meaning the end of big gains in the stock market because a new rate cycle will be beginning.
The problem with economists, the problem with the reporters who follow the fed and the problem with the hedge fund managers and the problem with the billionaires is that they just can't seem to grasp that Jay Powell, despite the way he looks, is just not one of them. He's not like any other Fed chief I have ever seen. He has learned from his mistakes like in 2018 when he talked glibly about having three rates. He is humbled by how hard it is to predict what the economy will do, but he wants to err on the side of more people being hired, because he would rather people get a job. He is not a believer that slightly higher inflation is going to hurt the worker, because that really doesn't matter if the worker isn't working.
Yep, Jay is different. He isn't the Tin Man Fed Chief. He has a heart. A heart is really hard to game, because he's not supposed to have one. He's supposed to say, "hmm it's getting really good, let's make it really bad." He just won't do that. It's not in his nature, given that he has seen that almost every inflationary bout since digitization is indeed transitory.
Heart per share. Heart return on investment. Heart times sales. Heart as a percentage of GDP. Heart price index. Heart labor report. The American oligarchs and their unwitting stooges just didn't take that course. Perhaps because it didn't exist. Perhaps because they are concerned about the same inflation Powell is worried about, but they want to rip his heart out like that great scene in Indiana Jones and the Temple of Doom when the evil priest reaches in and takes out a beating organ.
Sorry, this man's heart stays in his chest. And unlike his critics, he's got a brain, too.