The Fed left interest rates unchanged, again. I’m not surprised… But many pundits are wondering if this is Powell kowtowing to The Donald…
I can see why they might think that…
Do you remember the Alien movie franchise with Sigournrney Weaver? Remember how the baby aliens rips through its host’s stomach as it’s bornrn? And how an adult alien impregnates its victims by attaching itself to their face?
That’s what The Donald reminds me of when I think about his eruption into the Presidency… and his harassment of the Fed and its Chair Jerome Powell.
He disguises his messages (er… instructions?) to the central bank as “pro-business…” but what he’s really saying is: “Don’t let this big, fat, ugly bubble pop on my watch.”
Before his election, he was full of bluster and criticism about the Obama “bubble.” Since the Fed began raising rates to slowly deflate the bubble (a joke because no bubble deflates slowly), he’s been the greatest opponent to higher interest rates.
Powell held his ground for a while… standing firm on the Fed’s decision to raise rates and draw down the balance sheet.
Then out of the blue, he changed course, announcing more modest changes, and only if necessary. Again, yesterday, rates remained unchanged.
Is he succumbing to The Donald alien attached to his face, like those pundits think?
I don’t think so.
Rather, I think Powell was, and still is, reacting to the data, which has not looked good in recent months and quarters.
Yes, GDP came in at 3.2% for the first quarter – close to the range Trump has promised for the last three years – but don’t be fooled. As Rodney explained yesterday, that number stands on very weak foundations. Besides, there is simply NO way that we could achieve and sustain that level of growth. Not with the demographic cliff Boomers are walking toward and falling over in increasing numbers (but that’s a topic for another email).
The Fed isn’t blind to those “weak foundations,” in the U.S. AND around the globe. It even cited “mute inflation” as a reason for holding steady on rates yesterday.
Look at this chart of industrial production in key countries around the world…
The two leading exporters, China and Germany, both peaked dramatically and started to fall the most sharply in 2018. The euro area, the U.K., and Japan also followed down. The U.S. is again the only bright sign thanks to Trump’s tax cuts, but even we started faltering in late 2018.
I’ve warnrned all along that even the tax cut stimulus would be a short-lived shot in the arm against ever-increasing downward fundamental trends into 2022-23. Growth rates are already slowing.
The trade war is a major factor here, and it’s hurting the global economy, not just us and China.
Frankly, Powell was simply doing the smart thing in light of the evidence at hand. Trump, however, is doing everything in his power to pump up the bubble. In short, the Fed’s neither cowardly or Trump-whipped. For once, they’re doing the right thing.
Can Trump keep this bubble going until mid- to late-2020 so he can have a good shot at getting re-elected?
Most I talk to think so.
Not because I doubt his resolve and intentions… but because this bubble is getting so exponential in stocks that I don’t see any way it doesn’t blow within the next year. Even in my Dark Window scenario, where I project the Nasdaq will reach 10,000 and the Dow 33,000 by early 2020, the Great Crash is likely to happen BEFORE the election.
Make sure you’re taking advantage of this Dark Window while it lasts. And read the latest issue of Boom & Bust for the 11 sectors warming their boosters as Baby Boomers begin their flood into them.