They Just Can't Let It Go
Markets took off last week after the Fed made dovish statements to indicate rate hikes were over. This week, equities had moved higher each day until Powell spoke on Thursday. It seems the Fed can't help but make itself the center of attention.
It reminds me of the inspiration for this week's musings, "Revenge Of The Nerds." The 1984 movie was a surprise hit. There is so much good trivia surrounding this movie, that I'll skip the setup this week and jump straight into the trivia:
Despite many of the actors expressing reservations about appearing in the movie (due to the title), this movie was a huge success. The tiny budget of only $8 million was supplanted by the more than $40 million it earned at the box office.
Robert Carradine (Lewis) and Anthony Edwards (Gilbert) tested the effectiveness of their nerd costumes by attending rush-week at an actual college. The fraternity leader of the first house they attended took one look and said, "No way!"
The University of Arizona agreed to let the company shoot at the campus, then changed its mind after reading the script. Eventually the school agreed to let them shoot. Many students were actually used as extras.
Timothy Busfield (Poindexter) wore glasses that were so thick he literally could not see while wearing them. This was done to give the effect that the character was nearly blind and needed a strong prescription of eyeglasses. It worked.
Lambda Lambda Lambda - the fraternity depicted in the film, would end up becoming a real fraternity years later. It was founded at the University of Connecticut in 2006.
The iconic professional wrestler, Sting (aka, Steve Borden) auditioned for the role of Ogre, but casting decided he didn't have the right look. The role was then given to Donald Gibb.
Here's what we've seen so far this week...
Revenge Of The Nerd. As has been the case for most of the past two years, the Fed, yet once again, pulled a 180-degrees turn and gave the market another head fake.
Just last week, Fed Chairman Powell struck a dovish tone by stating "if we need to do more" with regard to further rate hikes. On Thursday of this week, Powell struck an entirely different tone by stating "we are not confident we have achieved such a stance" with regard to rate hikes and dealing with inflation. This 180-degree turn coincided with an 8-day consecutive run in equities. It reminds me of a scene in "Revenge of the Nerds" when Stan Gable, who is one of the jocks in the film, realizes the Lambdas are about to win the Homecoming Carnival and take over the Greek Council. He tells his girlfriend, "Times are changing, Betty. These nerds are a threat to our way of life." This is true for investors as Powell's comments have more to do with controlling equity returns than with inflation and economic conditions.
If fighting inflation is the real goal, then why the 180 flip by Powell? Gas prices were down nearly 9% in October and have dropped another 3% since the end of the month. The Manheim Used Car Index, which had exploded higher in 2021 is down 4% year-over-year and 6.6% in 2023 alone. While there are outliers, commodity prices as a whole, represented by the GSCI Commodity Index, are down 8% since peaking earlier this year. In fact, expectations are for next week's release of CPI to come in at +0.1% versus +0.4% in September.
The reality is, the Fed would rather equities not take off because it could trigger more sellers of bonds. As a refresher, bond prices are inversely related to bond yields. If there are more sellers than buyers of bonds, prices fall, which would, in turn, force interest rates higher. This is a scenario the Fed doesn't want as interest payments on Treasuries already make up an unusually large portion of the Federal budget. And, as if yesterday's statements weren't enough, Chairman Powell had a little run-in with some protestors during his speech. After admonishing them to leave, he finally said over the open mic, "Just close the _______ door!" I'm not sure we've ever heard the Chairman curse openly in a public speech. To be honest, there are so many places I could go with that incident, but let's just say it's already been turned into about a thousand different memes online overnight.
Recession Or Not - That Is The Question? There are still many clamoring of a coming recession. This is harder to answer if we look out into 2024. However, for the time being, we don't think we're there yet. In fact, the best response to that would be akin to U.N. Jefferson saving the day when he tells the football coach in the movie, "HOLD IT, COACH! You just hold it right there!"
Unfortunately, the COVID data that is still lingering among the various economic data points is probably giving us some false recession flags. For example, a lot is being made of the current levels of consumer credit card debt. However, if we take a look at that in the context of disposable income, consumers are not near the levels just prior to COVID and no where near the levels of 2000 and 2007 - just prior to those respective recessions.
The current level of excess savings from COVID is still high relative to pre-pandemic levels. In fact, while personal savings is lower overall, when compared to disposable income, it's still at a healthier level than both 2000 and 2007. In fact, it's actually improved year-over-year.
One major player, Goldman Sachs, stepped up with their 2024 outlook and stated that they view only a 15% risk of a recession in 2024. I don't know that we're willing to go that far, but when we look at other data. We would have to agree, at least in the short-term. A lot was made last week when the Fed revised their Q4 GDP projection down from +2.3% to +1.2%. However, this week, that number was revised back up to +2.1%, due mainly to higher projections for consumer spending. Similarly, both the Chicago Fed's National Financial Conditions Index and the St. Louis Fed's Financial Stress Index moved lower this week, indicating loose financial conditions. As always, the data is subject to change, but at this moment, we believe it's steady as she goes.
U.N. Jefferson saves the day....
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