This Week's Message: The Futility of the Fed

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Here's this week's message:

In case you haven't noticed, there's a lot going on in the world today -- and much of it carries implications for financial markets that demand close scrutiny.

In their weekly report, the analysts at Bespoke Investment Group echo the message we've been delivering herein since the first trade war shots were fired. Note that there's no mention of the Fed as Bespoke chronicles the catalysts for the most-recent stock market selloffs:  emphasis mine...

"At the end of September last year, the US’s 10% levy on $200bn of Chinese imports (the second tranche of three major tiers) marked the top for stocks, kicking off a slide that lasted all of Q4. 

On December 4th of last year, the President’s declaration that he was “a tariff man” kicked off the final 13% slide in stocks. 

This week the President is at it again, unilaterally slapping new 10% import taxes on the final $300bn/year tranche of Chinese goods; this batch is composed mostly of consumer goods, meaning that there will be a more direct impact on households than prior tariff rounds. 

The market ultimately bounced back from the Q4 mess, but it would be very painful for investors to go through something similar again."

The following (with added emphasis) from our July 26 blog post explains why I bolded those two items above:

"Bottom line: At the moment, the consumer is the only game in town, which, by itself, isn’t necessarily a bad thing – as consumer activity accounts for 2/3rds of the U.S. economy. My concern is that said activity is not presently resulting in businesses expanding to meet the demand (as one would expect). We, therefore, have to ask ourselves, if businesses continue to retrench (which they will as long as trade wars are a threat), how long before it bleeds into the lives of consumers?

It’s been my observation over the years that the stock market seriously influences consumer confidence, which no doubt presently speaks to the strong consumer spending numbers, and positive consumer attitudes (via the surveys). It’s also my observation, via the technicals (the charts), that the market’s a bit heavy at these levels, and, thus, a fundamental catalyst (perhaps trade war escalation with China, or, as virtually promised, inciting trade disputes with our other “partners”) could spark a significant correction that could put a huge damper on consumer sentiment and spending, which, presently being the only game in town, could morph into something ugly."

To further punctuate my point, here's another snippet from Bespoke's weekly message; this one related to Friday's jobs report:

"There’s nothing to be terrified of when it comes to the jobs numbers, but it’s also clear that the US labor market juggernaut of the past few years has slowed; that raises the risks that trade shocks could actually tip the economy into recession, though risks are not dramatically elevated at present."

But what about the Fed? You ask. Surely they'll step up the intervention to stave off any near-term recession and bear market risk!

Well, surely they'll try, in fact that's exactly what the futures market is signaling: Odds, via Fed funds futures, of a September rate cut were pegged at 63% the day before Trump's latest tariff tweet (last Wednesday), they're at 100% today. 

So that's good, right? I mean the Fed's there to keep things rolling, and that's why the President is pushing so hard on Powell.

Well, no, that's not good, in my opinion. In fact, if indeed the Fed can keep markets propped -- if not ballooned -- up for the time being, the fundamental risk (which is no longer a mystery to any non-politically-captured human) remains, if not gets even worse (the latter [gets worse] appears the most likely scenario at this juncture). 

And, to explain the futility of the Fed's present position, they're maintaining -- if not inflating -- asset prices through a process that in the present environment will do virtually nothing to promote growth in the real economy: I.e., cutting interest rates at these levels will absolutely not inspire the kind of healthy lending and spending that keeps fundamentally sound economic cycles going. Nope, the most the Fed can hope for is that ever-buoyant financial markets will keep animal spirits alive until better decisions are made on the global trade front. Problem being, it's the ever-buoyant financial markets that are keeping tariff wars (really bad decisions) alive!

Yep, folks, I mean it, the sooner the correction in stock prices -- needs to happen before the economy rolls over -- the better! All we can hope for is that the correction doesn't, in classic reflexive fashion, bring on the next recession. 

The latter (reflexivity) being what keeps the Fed, and yours truly, up at night. 

To repeat: The ultimate problem (read risk!) for the Fed, and the politician, and, not to mention, traders and investors at large, is that they believe that the Fed can keep the next recession from happening. 

Yours truly, on the other hand, believes that the Fed -- by essentially (in their actions) funding the trade war -- is not only aiding the process that'll bring the next recession on, but potentially making it (when it gets here) far worse by inflating financial asset bubbles while in the process using up the arsenal they'll need when the economy finally begins its descent.


Here's a quick (must watch!) technical analysis:

Once playing, click the icon in the lower right corner for full screen. Focus should occur after a few seconds; if not, click the wheel to the left of the YouTube icon to adjust:

Have a nice weekend!
Marty