Wall Street is over 6 months ahead, and she likes what she sees. The proof is in the behavior of the stock market: a choppy, rising foundation.
Why restless? Because we are in the midst of the negative news that produced the stock market’s sharp 5-month decline. It is this news that worries investors and makes the market volatile. Nevertheless, the rise in stock prices is alleviating concerns.
Barrons just described the action in his June 2 “Review & Preview” email:
“A different market. It may still be a temporary rebound or a bearish rally, but investor sentiment has changed significantly over the past two weeks. Since the Nasdaq Composite bottomed on May 24 , it’s now up 9%.Apparently the bad news is no longer that stocks are falling.In fact, in some cases, stocks are rising despite this.
This rising market is neither a temporary rebound nor a bearish rally. And turmoil is a key feature of the stock market climbing a wall of worry.
As for a bearish rally, this has already happened in March. It was a rapid and dramatic jump that apparently, but mistakenly, signaled the end of the months-long decline. (See my March 31 post, “Stock Market Bulls Try To Resurrect Struggling 2021 Favorites – Don’t Get Trapped”)
So what’s an investor to do?
Own shares – but…
…this bull market is going to be different. Therefore, forget the 2021 bull market opinions, thoughts, and strategies. gap as a lender of last resort). And that will produce the return of a healthy, market-oriented economy. setting interest rates and allocating capital resources.
After more than 13 years of Fed control, the benefits of this change will be dramatic and new to many investors and even Wall Streeters.
Important – The Fed (actually the 12 member FOMC or Federal Open Market Committee) is not a Solomon type entity. It is simply a government agency made up of a few politically appointed people, mostly economists. They are unable to take precedence over capital markets (i.e. the superior capitalist system of pricing and resource allocation) and they are misled into relying on econometric models built on past data. Their attempts to help have been the cause of many past problems in the economy and financial markets. Today’s inflation is the latest fiasco.
But what about this inflation and the Fed raising interest rates – and possibly a recession?
These three problems are real, but they are perceived and interpreted incorrectly.
First, today’s inflation
It has two drivers: the mismatch of supply and demand and excess money (what the Fed does). Mismatches between high demand and scarcity of supply lead to higher prices in specific areas (e.g. automobiles), but they will eventually correct themselves. Prices will drop when demand and supply align again. Therefore, there will be no permanent inflationary damage. (These double-digit inflation zones are probably about half the CPI inflation rate of about 8%.)
However, the creation of excess money by the Fed (AKA printing money or depreciating money) is a serious problem. He simply threw trillions of dollars in cash into the system. The result is called fiat currency inflation (“fiat” means currency not backed by anything of value like gold).
The absolute and proven major problem is this: once fiat inflation starts to rise, it infects all aspects of the economy and financial system, causing a price-cost push-me, pull-me cycle. , wage-productivity and demand-supply. changes. This non-productive activity aims to profit from or protect against a currency that is losing purchasing power.
This is what happened in the inflationary period 1966-1982. The cause? It was initiated and encouraged by the Federal Reserve and the Federal Government believing John Maynard Keynes’ theory that increased money supply and government deficit spending could produce, in multiplied size, private sector growth and employment .
Sound familiar? You’re right. The knowledge acquired during this period has faded, so here we go again.
Instead, prices rose everywhere, undermining any supposed effect on real growth. Worse still, instead of admitting it was a failed experiment, the Federal Reserve launched a series of misguided attempts to control inflation by dampening economic activity through monetary tightening. Instead, the Fed produced a series of recessions, and yet inflation continued to hit new highs. This graph shows what happened before the big wrench – the U.S. OPEC oil embargo of October 1973. The loss of oil supply caused a huge mismatch between supply and demand in plus rising fiat currency inflation that eventually led to extremes of stagflation and double-digit inflation.
Second, rising interest rates
Federal Reserve actions today represent a public approach. Before 1965, the Fed was silent. He would set the discount rate, but all money supply deliberations and actions were kept secret. As a result, capital markets set interest rates based on observable conditions. For example, the tightening would start to affect the supply of capital, so rates would start to rise. Ultimately, these actions would affect economic activity.
Today’s rate hike has nothing to do with those of the past. Previously, the Fed tightened money, pushing up capital market rates. Today, everything is determined by the Federal Reserve. In addition, the rates are significantly lower than those that the capital markets would set. Therefore, we need to discuss the effect (and non-effect) of the current interest rate situation on the economy and, therefore, the likelihood of a recession.
Third, a coming recession caused by these rising rates?
Of course, that’s a possibility. More likely, however, growth will slow, not reverse, as the Fed’s rate hike has nothing to do with the past. The main difference today is that interest rates remain abnormally low. Until rates reach the level determined by the capital market (i.e. without Fed intervention), the Federal Reserve is still in free money times.
How do you know when normality returns? When the short-term policy rate (for a 3-month US Treasury bill) is higher than the fiat currency inflation rate. Normality is defined by investors asking for and getting positive “real” (inflation-adjusted) interest income. Today it would likely be above 4%, well above the Fed-monitored 1.2% level. This derisory rate is a negative real return of around -2.8%, even worse than the negative -2% during the Fed’s near-0% nominal rate years.
Thus, the Federal Reserve still has a long way to go before allowing this rate to get closer to normal, let alone higher to produce a tight monetary environment. Therefore, real recession fears are unlikely to occur until the rate hits 5% or more.
Compare this graph to the one above…
The Bottom Line: Focus on the New Emerging Bull Market and Ignore Everything Else
Analysis of today’s past economic data and lagging market assessment are irrelevant. The Fed-caused fiat currency inflation is here to stay, and the bull market drivers of 2021 have come to an end. And yet, good times are coming – it’s just that they will be very different from before.
How different? We cannot yet know. It will be scalable. Therefore, “hiring” Wall Street experts now is a good strategy. See “A very different bull stock market is at hand – How to adapt” for an example of the actions to be taken.