Sitting Around the Table
July 15, 2022
Dow Jones 30670
S&P 500 3804
Here’s the Action Right Now
Disappointing quarterly results from JPMorgan Chase and Morgan Stanley also offer more bad news for the economy
Two of the biggest financial institutions in America disappointed with their earnings announcements today. You would think that the rest of Wall Street would start to get behind the concept that earnings across the board have to be lowered for just about everybody. Some people never learn. What do we mean by that? Think about it. The market has been going down since January. We all know that the market is a discounting mechanism that predicts the future. It seems nobody realized back then that we were headed for a recession. The market by trading down several thousand points was telling you that we were going into a recession. At the moment there is not an economist in America that will state that we are in a recession today. It is clear to us that we are in an economic downswing.
There was a slight downtick in economic activity in the first quarter. In a few weeks we will know about the second quarter that ended June 30th. Now the way this works is that if you have two quarters in a row with a decline in an economic activity you are in a recession. That’s the agreed upon rule in economics. Isn’t it kind of obvious that we just went through the second quarter of economic activity decline? By the way JPMorgan Chase Bank and Morgan Stanley are the two institutions announcing difficult earnings for the quarter.
We have zero concerns about Morgan Bank because with interest rates continuing to go higher, the bank is going to make a killing over the next year or two. Everybody else has to be rethought. Banks always do really well when interest rates are high because they make the difference between interest earned and interest expense. That is their profit margin for the last 2,000 years whether you call them bankers now and money lenders back then makes no difference.
U.S. stocks clawed back from an early rout Thursday after all kinds of inflation data fueled speculation that the Federal Reserve could aim even higher on the next interest rate hike and following disappointing financial results from some of the nation’s biggest banks.
The Dow Jones industrial average fell more than 140 points at the closing bell, a decline of 0.5 percent, after recovering from steep losses that dragged it down more than 500 points earlier Thursday. The broader S&P 500 index lost 0.3 percent and the tech-heavy NASDAQ barely slid into green territory. Stocks have been hammered throughout 2022, with the Dow off by more than 15 percent for the year. JPMorgan chief executive Jamie Dimon and a very smart man, said although the labor market and consumer spending remain strong, trouble is on the horizon. He also talked about geopolitical tensions, high inflation, waning consumer confidence and uncertainty around the Fed’s “never before seen” rate-raising campaign are “very likely to have negative consequences for the global economy further down the road.”
At the moment there is no indication whatsoever that inflation could be slowing. But fresh Labor Department data for June showed otherwise.
The unexpectedly high 9.1 percent reading for the consumer price index released Wednesday dimmed the likelihood the Fed will be able to bring prices down without triggering a recession. This is rather simple, we are in a recession right now and NOBODY WANTS TO ADMIT IT.
Spiking factory costs in June were linked to energy prices, specifically those of natural gas and diesel. The U.S. average for a gallon of diesel stood at $5.59 on Thursday, according to AAA. That’s 71 percent higher than last year. Diesel fuel represents much of the industrial transportation system, and its higher cost has made it more expensive to ship raw materials from overseas, operate heavy machinery, and truck finished goods to market.
Gas prices reached record highs as President Biden calls fighting inflation his top priority. Inflation has been squeezing Americans across the board, forcing them to pay more and more each month for essentials like gas, housing and food. And while fuel prices have retreated from their June highs, when the U.S. average passed $5 a gallon, they remain up big time compared to a year ago. The national average was $4.60 on Thursday, roughly 46 percent higher than it was a year ago.
The pipeline is filled with inflation that will eventually move up to the consumer level. This pipeline has not hit us yet. Today only 13 percent of Americans believe that they are optimistic about the economy being headed in the right direction in the future. That is the lowest number we have seen in our lifetimes. What it means is that the American people as a group do not believe the President is actually managing the economy. It does not bode well for him.
The Fed needs to fight the inflation war on two fronts, at the producer level and consumer level. The recent and upcoming rate hikes are part of the Federal Reserve’s plan to get decades-high inflation under control. A higher interest rate makes it more expensive to borrow money, pumping the brakes on business investment across the board and softening demand in debt-driven industries like autos and real estate. Increasing rates should theoretically bring prices down over time, but the deliberate slowing of economic growth also raises the risk of a recession which we think we are already in even though it is unannounced.
Central bank policymakers have raised interest rates three times this year, including by 0.75 percent in June. The Fed had been widely expected to raise its key rate by another 0.75 percentage points later this month. This week, Canada became the first Group of Seven nation to raise rates by 100 basis points, fueling speculation that the United States could follow suit. If it does, it would be the largest one-time increase since the Fed began announcing rate hikes in the early 1990s.
Christopher Waller is a Fed governor; he said Thursday that while he still supports a 0.75 percentage point increase at the Fed’s meeting in two weeks, he is also open to larger hikes depending on the results of upcoming retail sales and housing data. “If that data comes in materially stronger than expected, it would make me lean towards a larger hike at the July meeting to the extent it shows demand is not slowing down fast enough to get inflation down,” Waller said during his remarks this week. Wall Street may already be pricing in expectations for a larger increase, Citigroup economists wrote Thursday in a note to clients, adding that they expect the Fed to deliver a 100 basis-point rate hike at its meeting later this month.
There are other analysts who don’t believe the central bank would pursue such a significant increase given the risk of a recession. Many think and remain skeptical that the Fed can pull off simultaneously normalizing its balance sheet, controlling inflation, and avoiding severe market disruptions. We personally do not think the Fed can manage a soft landing. You just can’t fine tune a $20 trillion dollar economy that carefully. Keep in mind that the Fed missed the beginning of this recession. They did not get in front of it, and we don’t think they are in front of it yet. As a result, Wall Street just experienced its worst first half of the year since 1970.
So now as a subscriber you should ask, shouldn’t we all be sitting on the sidelines and watch this thing play out? That would seem logical. First of all, if you look back over the last several years or even to our beginnings as a service many market cycles ago, the following is true. We have ALWAYS MADE MONEY FOR OUR SUBSCRIBERS. Through thick and thin, and we don’t think it is going to be any different this time. They only thing we ask is that you not be overextended which means, NO MARGIN, or NO DEBT. It’s economic times like this that destroy people who are on margin. If you own your stocks for cash you will survive anything that happens. We are buying all kinds of stocks now because most of the securities we like, were down over 50% before we recommended them. Those prices are already reflecting a recession. The market will recover long before the economy does. The stock market always leads the recovery. It starts going up before economic activity starts rebounding. It’s what always happens and it is not going to be different this time.
Has anybody noticed that the dollar has pulled even with the Euro for the first time in a generation? This is a very big deal. The euro became less valuable than the dollar for the first time since 2002, a mark of how many global investors have embraced the greenback for its relative stability. The European Union’s central bank is also raising interest rates but is doing so at a slower pace. The economy is very close to stalling out here. The President needs to get on board and start proposing the usual remedies that you employ when you are in a recession. This way the American people will realize that we do have President in charge and he is doing something. This would be helpful. This is the time to use the bully pulpit as they say. Stay tuned for more.
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