The case for one and wait at last can be made with forcefulness. Today's selloff gives Fed Chief Jay Powell just what he needs to hike rates once and then wait and see what the impact might be.
What makes me so certain that Powell can stand down after this hike and not compromise the independence of the Fed?
Let me count the ways.
First, stocks have collapsed. The FAANG stocks have lost more than a trillion dollars in value. I know not many people own individual stocks any more but if they do a lot of them own these stocks. Facebook's (FB) stock is now down 25% and I can't make a case for it given the company's lack of leadership and the sense of total disarray.
Apple's (AAPL) stock is hanging on to a 5% gain. Its decline is directly related to press reports that its phones aren't selling well. If that is the case then phones are going to cost a lot less by the time the inventory correction is over.
Amazon's (AMZN) stock is still up 25% and I think that any strength in Amazon is deflationary. No one can compete effectively with Amazon except on price so when I see big gains in omnichannel these days I think prices are going lower.
The stock of Netflix (NFLX) is still up 40% as record numbers of people continue to cut the cord, which, in itself, is deflationary. We have seen 1.2 million people cut the cord in just the last three months. Alphabet's (GOOGL) stock is down 2%. Plus, the losses are going mainstream. The Drudge Report wrote about the Facebook/Netflix/Alphabet Death Cross. Surprised they didn't pick up stories about Apple's head and shoulders pattern.
The sum total of all of these losses will weigh consumers' minds as will the fact that 40% of all stocks are in bear market territory and 2018 has seen all the gains vanish.
Now we could argue about what it means to have the market down this much. We could say that it doesn't affect the psyche of the public. I have studied this for 40 years and there isn't that much correlation until people start losing a lot of money. If you bought at the recent high you are down about 20% for a ton of stocks. Believe me you feel that. More importantly the Fed can see it. Now the Fed is notorious in all attempts to rule out any importance of the markets. By the way, so is Larry Kudlow, the president's chief economic advisor, who seems more bullish than ever. I, on the other hand, can recall only one time when the market was out of synch with what was about to happen with the economy and that was in October of 1987 when we crashed because the market could not handle an influx of sell orders from the futures pits.
It is unnerving that there are still many bulls who come on TV and act as if dip buying is right. We can have a rally from any level but we have to admit that dip buying in some of the high fliers has been a disaster. The negative wealth effect is here.
Second, oil. It has collapsed. It's breathtaking in its decline, off $22 from its October highs. That's an extraordinary boon to the consumer who has seen an endless increase at the price of the pump. I have to believe that the price is going to come down and come down hard over the next few weeks.
I know natural gas is up a lot but we have an abundance of natural gas and it just has to get to where it has to go, which will be self-fulfilling in a couple of warm days. I think that it spiked so hard because so many utilities now use renewables and they need nat gas as a back-up. I regard the spike as temporary given our own domestic surfeit.
I think oil can go still lower as the hedge funds who own it are forced to liquidate their permissions. I have been using a high $40s price target for oil and I think we get there.
Third, the collapse of the retailing stocks tells you a lot more than the execs who are saying it will be the best holiday season ever because the consumer is in such good shape. Now I regard the decline in these stocks as frightening and would, on their own, make me feel that the Fed shouldn't even raise once in December, but I recognize that we could have one more hot employment number in December before the layoffs begin in retail. The stocks can't all be wrong. They are signaling a slowdown coming loud and clear and if the Fed ignores them it is just being rash. Remember, the retailers took down a lot of inventory ahead of the tariffs from China. What happens if they can't sell it all? Lower consumer prices that's what.
Fourth, housing is awful. I used the data from MBA, which I regard as the most authoritative and its forecaster Joel Kan had this to say: "Single family starts dropped for the second straight month in October to 865,000 units, the slowest pace in four months. Single family starts in October decreased year-over-year the largest drop since March 2015 and only for the second time since then."
Now we know affordability has hurt this calculus. The Fed's moves have caused mortgages to go to 5%. Refinancing is at a 18 year low. Many people who have a lower mortgage than 5%, which is everyone who was allowed to refinance, will be highly unlikely to want to move to a new house with a mortgage well in excess of the current rate.
Wells Fargo (WFC) just laid off 900 people from its home mortgage lending unit. Do you think that's all the layoffs that will come from this decline? You have to recognize that housing declines can cause an awful lot of layoffs as the builders recognize the market isn't coming back
Fifth, for the first time in 102 months our hotels' collective revenue per room fell last month. That's a sit up and take notice figure from a segment of the economy that's been very strong.
Sixth, the trade conflict is going to slow the economy down. I don't think it takes a genius to know that tariffs battles have frequently led to economic slowdowns. But when the 10% tariffs against China go to 25% there's going to be a lot of pain and stress in the system.
Seventh, we are getting some mainstream data that's negative. For example, American Electric Power (AEP) , the nation's largest power transmission company told us last month: "The mix of growth has started to shift. Through the first half of the year growth was balanced across most industries and operating companies. In the third quarter growth was dominated by the oil and gas sectors, while the remaining sectors moderated."
Hmm, higher energy prices. Well how about if oil just fell $22.
Eighth, autos. The average age of the fleet is now 11.2 years old. Cars last longer. The demand continues to slow for new cars. Used cars fell 1% in value in the month of October.
Now understand I totally get that we could have a strong employment number in December but not necessarily a strong wage increase because of all the reasons above. I am willing, grudgingly, to say that Powell can raise another quarter point without throwing us into a real slowdown but I believe that when we annualize the tax cuts, when the tariffs come into place and when the retail and housing layoffs start, we are going to wish that he didn't raise rates, especially if we own stocks because we will wish we sold them right here unless Powell says, "Lets do one and wait." Jay, it's okay that I said it. That doesn't taint it, but you know what will? A declaration that you, too, know nothing, a reprise from more than a decade ago.
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