If the consumer is so strong what the heck is the case for a rate cut? With WATCH-Walmart (WMT) , Amazon (AMZN) , Target (TGT) , Costco (COST) and Home Depot (HD) doing so well, isn't it foolish to do anything but boost rates given that unemployment is the lowest in 40 years? Is President Trump hectoring Fed Chief Jay Powell for nothing?
Not really. As I explained last night there are two economic worldviews colliding and I think that the weaker of the two, the recession camp, on the eve of big Fed pow-wow in Jackson Hole - deserves a hearing.
So I am going to give it one.
First, let's take the obvious, the words of the Chosen One, praise be he, President Donald Trump who said point blank we will have to take pain in order to get the Chinese to change their ways. He knows that the economy is strong enough now to take on China, but how about the future? Wouldn't it be a good idea to have some insurance here by bringing our short term rates closer to the rest of the world's levels? I think that's perfectly reasonable given that we are getting terrified.
Think about the world right now. We know that the president is right. China is slowing. When you adjusts for their nearly 3% inflation, these Chinese numbers are alarming. The trade war is devastating them, but that's spreading to all their trading partners. It could be a pretty Pyrrhic victory if they agree to a reasonable deal only after the trade war causes a worldwide recession.
The United Kingdom economy is shrinking and I am 99% sure they will have a recession unless they take a hard Brexit off the table in the next month. Britain is such a mess: both major parties are delusional. Johnson thinks he can negotiate a better deal, good luck with that. Corbyn thinks he can negotiate a "Worker's Brexit" whatever the heck that means. The EU has made it pretty clear that they're not going to make any more concessions - why would they?
German GDP is slightly negative and the country won't even take advantage of negative bond yields to issue debt to build housing and schools for all the immigrants they took in. French GDP is barely positive, nearly all the data from Europe is ugly - just 0.2 percent growth for the Eurozone as a whole last quarter. The action in the U.S Treasurys may have a lot of confounding variables, but the European bond markets can be taken at face value and they're screaming recession.
Can we shrug it off? I wouldn't if I were on the Fed. The EU and China together represent roughly 40% of the GDP worldwide but Latin America is awful and India's decelerating. A year ago we had synchronized growth, now we have a global slowdown. That has to hurt to some degree even if only 12% of our economy is export oriented.
The contrarian in me, as well as my old-as-the-hills age warns that having the lowest jobless rate since 1969 is not necessarily a good sign. There was a recession in 1969! Unemployment was at 4.7% in August of 2007 on the eve of the Great Recession.
While I have been cataloging the greatness of WATCH retailers, they are crushing the brick and mortar stores. Sure the consumer is robust but these companies have the balance sheets needed to compete in this new, digitized world.
We haven't talked much about the Boeing (BA) 737 Max, but if the assembly line gets shutdown because of the accidents, that's going to reverberate around the country.
We think that housing is strong, but when I listened to Toll Brothers (TOL) the other day I was anything but reassured. People are going to Home Depot to renovate perhaps, and not build? We have an anemic number of housing starts.
Then there are all the aggregate indicators: Lumber's down 50% year over year. Natural gas is so low you have to wonder if there is a slowdown in manufacturing . Carloads per train are down. Linerboard and chemicals are falling. Freight costs are going down. There isn't a commodity I follow that's going up in price, unless you count gold. Some of that is because the auto market is simply not strong. Steel, aluminum, glass go into auto-making.
Maybe we can keep chugging along with the low interest rates courtesy the EU. But it might not be enough.
That's why it could be great for the economy if it started taking down the rates that it put on too fast and too furious as our president says. Given the pessimism and fear that the president's tweets instill, it makes a great deal of sense to give the economy some leeway to falter, even if Powell finds the tweets repulsive, which I sure hope he does.
I know it is hard for some of the more hidebound, less attuned Fed governors to think that you should lower rates when the consumer is flush. But there is a lot more to the economy than consumer spending.
I also feel that there are still people on the reserve board who do not get the new economy. They don't know how deflationary it all is. The vast majority of companies we have on Mad Money use the tech innovations to keep costs down. The gig economy is a price deflator. We know that as robust as the big retailers may be, much of that comes on the back of the smaller and medium sized operators and the mall denizens most of which are fighting for their lives. The numbers from L Brands (LB) , which is Victoria Secret, last night were simply awful and I can't imagine it can keep doing the same thing. I feel the same way about Macy's (M) . And heaven forbid if a retailer in a recent private equity IPO... just be glad that stocks stop at zero.
You could easily argue that there is enough good to offset the bad and I would not disagree with that. But I have done a ton of work on where our trade team is versus their trade team and all I can say is don't get your hopes up for a U.S./China deal any time soon. We've gotten away with little pain so far. However, the president is ready to ratchet things up again, and I think we would be very ill-advised to believe there will be no impact. And if we get a recession there are loads of business people who have to believe that a Democrat gets in the White House. I don't want to say if that's good or bad. I will say that it is bad for many people who look to make big spending decisions.
So here's the way it cuts: the Fed has more than enough reason to be preemptive in a way it's never been, preemptively positive. That's exactly how it should be.