Overview:
Today, the Federal Reserve raised the fed funds rate by 75bp (.75%). It’s the largest increase in almost 30 years, and the big move was due to runaway inflation that the Fed had previously termed “transitory”. We’ve been on record for months saying that inflation is understated by approximately 100%, is not transitory, and that the Fed is far behind the curve (meaning they were late and slow in raising rates). For those of you who want more detail on our past writing on the topic, you can find dozens of articles here: https://deepknowledgeinvesting.com/category/market-commentary/.
After the triple rate increase (3x the typical .25% raise), Fed Chairman, Jerome Powell, talked about his plan to be more aggressive in getting inflation under control and that we could expect the next rate hike to be 50bp to 75bp. After falling all year due to concerns about Fed rate hikes, today the market rose because people were happy that the Fed is now taking the issue seriously. The thinking as far as we can tell is that the harder and faster the Fed raises rates now, the sooner they can reduce rates which will lead to higher stock prices and another asset bubble. (The financial version of medicine now, party tomorrow.)
This is completely insane so let’s go through the reasons:
This is a Real Problem:
First, the Fed has to address a real problem. Inflation is crushing people’s standard of living. Housing prices are up 20% year over year. Gas prices are over $5 per gallon. It costs a fortune to heat a home right now (or will in a few months). And food prices are up substantially more than the 8% – 10% we’ve seen in recent inflation reports. Years of creating trillions of dollars at the push of a button, massive deficit spending by Congress and the White House, and zero interest rates have created price inflation that is well above the wage increases people are seeing.
The Fed is Raising Rates into a Recession:
Next, the Fed is understating existing problems in the economy and how effective their rate hikes are going to be. We recently saw carnage in retail stocks as spending on goods has cratered. People are spending more on gas and experiences, and retailers are now overstocked with goods that they’ll need to mark down to move. Our adjusted calculation of GDP has shown that we’ve had negative GDP growth for the past two quarters meaning that we’re already in a recession. That, combined with high inflation, means stagflation. And higher mortgage rates are locking up the housing market until it too clears at lower prices. The bad news is that at higher interest rates, people will pay less for a house, but still have the same monthly payment. What we’re telling you is that the Fed needs to raise rates, and is doing so right into a recession. We’ve previously highlighted they’ve put themselves in a no-win situation.
And Has No Idea What They’re Doing:
Finally, people are acting like the Fed now has things under control. We need to point out that after today’s hike, the fed funds rate is 1.50% which is very low by historical standards and the Fed balance sheet STILL is about $9 trillion dollars including mortgage securities it’s not allowed to hold. The Fed is funding massive deficit spending, fueling the stock market, providing liquidity to the mortgage market, and acting as the counter-party to too-big-to-fail banks who no longer trust each other. The official inflation rate is 8.6% and we think the real number is closer to 16%. The producer price index is in double digits. The White House is still talking about multi-trillion dollar stimulus bills (and pretending that will reduce inflation instead of make it worse). And instead of a functioning free market, we now have a group of bureaucrats and academics who have never run a business managing huge aspects of the American economy including complete control over the money supply.
Conclusion – Someone Call Jerome Powell:
Under normal circumstances, this would all be a bad idea, but the people in charge have no business being allowed access to a checking account let alone the keys to the entire economy. Over two months ago, we wrote this:
Shortly after the announcement by the Fed today, the market traded down. Since then, Chairman Powell has said that the Fed is not considering 75bp rate hikes, and that caused the market to rise quickly. We believe that Chairman Powell is telling the truth that the Fed isn’t considering 75bp rate hikes right now. We also note that Mr. Powell has admitted he has been behind the curve, and should have raised rates sooner and faster than he has.
Our point two months ago was that Chairman Powell wasn’t considering doing what he NEEDED to do because he has been behind the curve all along. Today, we got a text message from a member of the Deep Knowledge Investing Board of Advisors that said, “Why does anyone listen to these clowns anymore?”. That’s a great question. We keep seeing headlines and financial reports that have the word “unexpectedly” in them. We understand the confusion. Last September, the Federal Reserve projected a 2022 year end federal funds rate of .25%. By March, that rose to 1.9%. And now, the Fed is expecting to be around 3.4% by year end. Clearly, the people in charge have no idea what’s going on either.
The good news is we do. We’ve been telling subscribers since November that inflation is a massive problem that wasn’t being addressed, and apparently no one at the Federal Reserve got the message. Let’s fix that. If anyone here knows Jerome Powell, have him reach out to us at IR@DeepKnowledgeInvesting.com. We’ll give him a free subscription to Deep Knowledge Investing. That should solve the issue of “unexpected” problems from inflation. While we’re at it, please feel free to contact “Hurricane” Jamie Dimon at JP Morgan Chase. He’s definitely sure that at some point we might have an economic downturn of some unspecified magnitude. Let him know we’d be happy to help.
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