Why the two-day rally ended last week is important

Let’s say you wanted to design a program to lower inflation. Wouldn’t you do exactly what Governor Jerome Powell is doing? You would raise interest rates aggressively, and I dare you to say that he is not doing exactly that. You want to ignore positive numbers like the weak CPI last week by sending out Chris Waller – one of the more hawkish Fed governors – this past weekend to say rate hikes are far from over. You won’t claim any victories whatsoever, including the collapse of cryptocurrency exchange FTX, which filed for bankruptcy on Friday. You just wanted to stay mum, so investors can expect another 75 basis point increase, especially if retail sales this week come in above expectations.

There are many ways to measure a Fed chief. Most of the people who comment vociferously and viscerally against the Fed tend to be rich people who want to preserve their wealth but somehow come across as altruistic. Or people in the media see them as such because they are such precious bookings. That is probably why they are valued in the eyes of the viewers.

The old me would say, “What a bunch of selfish bastards.”[ads1]; The new me simply says, “I know where they’re coming from, but they’re bad advice.”

But let’s use this view as a litmus test. You must be wondering where are all the rich castigators? Maybe they realize that Powell is tougher than they thought? I think so.

Their silence is louder than their protests. Powell is the real deal and he’s not done until he softens our economy, shrinks our portfolios, reduces our purchasing power, lowers our wages and cheapens our goods. The good news so far: He does all of this. The amazing news? He does not harm the company’s earnings in the process. They shine.

Consider: Last Thursday and Friday saw back-to-back winners, which is very rare in this year-old bear market. If you bought the market high on Thursday, you’re still up. I can count on one hand how many times that has happened since the summit.

Could it be as important as many people think?

That’s a tough question, because for the Fed to check all its boxes, Powell needs wages to flatten out, and that hasn’t happened. He needs to see weakness in CPI beyond the handful of line items that softened things in last week’s reading. Most importantly, he needs to see our purchasing power diminish, and we’re definitely not there yet.

But let me give you a bizarre curveball. Part of the reduction in purchasing power is speculation. The speculators overconsume because it is in their nature to borrow too much. So what do we do with the crypto meltdown? How much money is actually lost in crypto? How big are the losses? I’m so sick of the Lehman moment nonsense (the collapse of Lehman Brothers in 2008 was the key moment in the 2008 subprime mortgage crisis). I don’t even like the comparisons to the fall of Enron in 2001. As my late mother would say, comparisons are odious – had she lived longer she might say irrelevant.

What matters is that financial disasters like the destruction of FTX CEO Sam Bankman-Fried make people reassess their wealth and spend less – and I don’t just mean those who actually lost and will lose a lot more money on these often worthless cryptocurrencies.

Take it a step further: Another unknown is how much money is invested in FAANG/M (Facebook, Apple, Amazon, Netflix, Google, Microsoft). If you’re in the S&P 500, you probably feel punished, but if you’re mostly in the FAANG/M, you feel broke.

Why does all this matter? Because the Fed ideally wants to stop in time while supply chains become more efficient, which we see with the reduced logistics costs. However, it would certainly help if we slowed spending as a nation. We need both more goods on the market and fewer goods sold. Any excess will lead to both lower prices and layoffs.

Does it matter if the layoffs are largely concentrated in some technology, including fintech and real estate and retail technology?

At one time I thought these sectors were too small to make a difference. You would need mass layoffs in retail, autos, housing, everything but the insatiable healthcare sector.

Now I’m not so sure. Maybe layoffs in Silicon Valley are having more of an impact on the economy than we thought. Just as technology became a bigger part of the S&P, so did the economy. Sure, it’s not nationwide, but tends to be concentrated only in Northern California and Seattle. But the dismissals will take place in the ranks that are not in these areas.

Anything that reduces the speed of spending, combined with a reduced cost of logistics, could lead to lower prices and wages – which should result in slower and smaller rate hikes. That is why the 2-year government interest rate has such difficulty staying above 4.5%.

I wouldn’t say we’re out of the woods when Fed officials say we’re in the woods. I will say that Thursday and Friday felt important to me because they were actually based on softer numbers that seemed unassailable, and yet did not herald revenue failure.

Sure, it seems ridiculous that we could get through this whole process of giant revenue blowups. But we’ve seen the hottest sectors of the economy – technology and the internet – revealed as far more vulnerable than we thought. It’s amazing how much Meta platforms (META), Alphabet (GOOGL) and even Amazon ( AMZN ) relies on advertising for its earnings growth, and that’s coming as traders feel the Fed is tight-fisted. Microsoft (MSFT) has felt the last of PC Armageddon. Advanced Micro Devices (AMD) and Nvidia (NVDA) has been overwhelmed by the undeniable weakness of games – even if the game companies deny the weakness.

Netflix (NFLX) is coming back, but it was never this big. apple (AAPL) is hanging in there, even if it seems impossible to last. But you know my feeling on Apple: own it, don’t trade it.

I’m not including the hundreds of other tech stocks that have collapsed. But if I did, the decline can only be considered seismic.

Which leads to a logical question: What if technology of all kinds and crypto turns out to be bigger than we think? What if they can cause the downturn that we need to keep the Fed in check? Do we really need old-school companies missing the numbers to see the end of austerity? Perhaps the voracious spending that came from these hot sectors will cool off as the logistical nightmare ends. There may be enough to make us wonder if we are no longer in the process of breaking inflation than we thought.

As I think about what to say at Thursday’s monthly meeting, remember that we’ll have some really awesome retail sales data to help you solve your dilemma. The best that can be said, however, is that the two days leading up to the end of last week seem significant – especially in light of the collapse of FTX.

These two days seem to suggest that the Fed is taking a break. Although I would say that it is a break of its own.

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