The Fed, GDP, Fiscal
Policy, Wealth Destruction and Markets
By Victor
Sperandeo with the Curmudgeon
The Fed and GDP Take a Back Seat:
In light of a weaker than expected BLS August jobs report, the Fed is
poised to lower the Federal Funds rate by 25-to-50 bps at the conclusion of
their September 18th FOMC meeting.
·
For those in the 50-bps camp,
nonfarm payrolls rose just 142,000 versus expectations for 161,000, while
previous months saw hefty downward revisions (as usual).
·
For those in the 25-basis
point camp, the unemployment rate ticked down to 4.2% from 4.3%, while average
hourly wages surprised to the upside, helping ease worries about the health of
the consumer.
A half-point cut isn't a "good omen for markets, because
I believe at that point people are starting to price in more of a recession
than if the Fed can cut at a steady clip of 25 basis points for a few
meetings," said Chris Graham, chief investment officer at Nationwide
Financial, in an interview with Morningstar.
Yet that really doesn’t matter! Most investors are
looking at the Fed to “create wealth” via stock market appreciation (via past
rounds of QE and ZIRP). However, fiscal
policy is far more important, especially after the November 5th
elections.
The U.S. GDP growth rate (3.0% in Q2-2024 vs
1.4% in the 1st Quarter of 2024) is also not that important now, as
it is stimulated by U.S. government spending prior to the elections.
Victor believes budget deficit spending will
disappear after the elections as a tool to manipulate the economy for
votes. The Curmudgeon is not so sure
about that.
November Elections Take Center Stage:
What really matters is which party will gain power in
the November 5th U.S. elections and what policies they will
pursue.
Victor opines that Donald Trump’s fiscal policies are
economically far better (generally) than those of Kamala Harris, but Trump’s
tariff policy is a major negative.
Tarriff’s are
effectively a tax on goods imported, but Trump believes the tax will be paid by
the producing importers of the goods.
Yet the price of the goods purchased will include a “tariff tax,” so
consumers will actually pay higher prices for imported
goods. Increasing the price of imports makes the wealth of the nation (i.e. the
people) poorer!
Wealth of Nations:
Adam Smith pointed out 250 years ago in his Opus
Book, An Inquiry into the Nature and Causes of the Wealth of
Nations:
“That
state is opulent where the necessaries and conveniences of life are easily come at. ...To talk of the wealth of nations is
to talk of the abundance of its people. Therefore, whatever policy tends to
raise the market price( of the necessaries and
conveniences) diminishes public opulence
and the wealth of the state, and hence it diminishes the necessaries and
happiness of people."
It is sad and regrettable, as well as foreboding that
Fed Chair Jerome Powell never read or understood this? He could not have, as
the Fed does the exact opposite of what Smith taught us. Increasing the money supply above the
economic growth rate causes inflation which raises prices of necessities and
thereby destroys wealth.
Cause of Inflation – Reiterated!
We have many times stated that inflation is caused by
an “increase in the quantity of money circulating, in relation to the goods (and
services) available for purchase; inordinate general rise in prices leading to
a fall in the value of money.”
Vladimir Lenin:
This was very well understood by Lenin… and is part of
the Socialist/Communist plan to change the Capitalist’s free market system to a
socialist dictatorship.
“Lenin is said to have declared that the best way to
destroy the Capitalist System was to debauch the currency. By
a continuing process of inflation, governments can confiscate, secretly and
unobserved, an important part of the wealth of their citizens. By this method
they not only confiscate, but they confiscate arbitrarily; and, while the
process impoverishes many, it actually enriches some.
The sight of this arbitrary rearrangement of riches strikes not only at
security, but at confidence in the equity of the existing distribution of
wealth.”
John Maynard Keynes:
“By a continuing process of inflation, governments
can confiscate, secretly and unobserved, an important part of the wealth of
their citizens. There is no subtler, no surer means of overturning the existing
basis of society than to debauch the currency. The process engages all the
hidden forces of economic law on the side of destruction, and
does it in a manner which not one man in a million is able to diagnose.”
Review of U.S. Equity Markets Last Week:
The S&P 500 SPX slumped 4.3% in last week’s
holiday-shortened trading after U.S. investors returned from the Labor Day
holiday. The Dow Jones Industrial
Average shed 2.9% - making for the worst week for both indexes since March
2023.
Technology stocks were hit hard, with the Nasdaq
Composite COMP slumping 5.8% for the worst weekly performance since January
2022.
Here’s a one-month chart of the tech heavy INVESCO
NADAQ 100 QQQ ETF (Mkt cap= $175.24B), which has gone nowhere and seems to
be rolling over:
…………………………………………………………………………………………..
“We’re at a place in time where it’s easy to get
nervous,” said Art Hogan, chief market strategist at B Riley Wealth Management.
“The critical question is whether we’re seeing an economy that’s just
normalizing from an overheated second-half last year, or something worse. And
we’re getting a lot of mixed data.” Stocks often struggle when there is
uncertainty around major issues, Hogan added, noting that September is
historically the worst month of the year for the S&P 500.
…………………………………………………………………………………………..
Victor’s U.S. Stock Market Outlook:
The key to the U.S. equity market is whether the August 5th
closing lows (S&P 500=5,186.33; NASDAQ=16,200.08) hold or are penetrated on
high volume. If prices decline across
the board, that will indicate a bear market. It is Victor’s strong assumption
that the August 5th lows will not hold.
The overstated belief that elections don’t matter and
“the Fed has your back” could not be more wrong today. Elections do matter,
because they determine forthcoming fiscal policy, while the “Fed put” may be a
thing of the past (note 2022 declines in both stocks and bonds as the Fed
aggressively raised rates).
The Chartist (Sept 5th
newsletter):
“The overhead resistance in evidence at the July
highs turned out to be quite formidable. The Dow was the only major average to
take out its July highs on a closing basis. The S&P Midcaps, Russell 2000,
and Nasdaq came within .6%, 1.8% and 3.7%, respectively. The benchmark S&P
500 was turned back after making several attempts over multiple trading
sessions to push its way into record-high territory. The closest it came to its
all-time highs was last Friday when it finished within 0.3%.”
“On the negative side, the S&P 500, Russell 2000,
and S&P Midcaps closed below their 50 day moving averages in Thursday’s
session to join the Nasdaq. In addition to this, the S&P 500 has traced out
a potential double top.”
B of A Global Research – Big Money Moves to Cash:
1. Weekly Flows:
$60.8bn to cash, $9.5bn to bonds, $3.0bn to stocks, $0.6bn to gold, $0.6bn from
crypto.
2. Flows to Know:
·
Cash: largest 5-week inflow
($231bn) since Dec '23
·
Crypto: 2nd largest weekly
outflow ($0.6bn) on record (Chart 13)
·
Treasuries: biggest weekly
outflow ($1.9bn - Chart 14) since Jan '24
·
US equities: 1st weekly
outflow since Jun'24 (albeit teeny $20mn & tech remains #1 sector YTD
·
Energy: largest 5-week outflow
($3.9bn - Chart 15) since Jun '23.
3. BofA
Private Clients: $3.7tn AUM…62.4% in stocks, 19.9% bonds, 10.9% cash; BofA
private clients selling stocks, buying bonds (biggest weekly inflow
since May'24); in ETFs private clients buying REITs, financials, staples, and
selling Japan, healthcare, TIPS in past 4 weeks.
……………………………………………………………………………………………….
Victor’s Conclusions:
Sadly, the world has no real leaders that have made
any changes or progress to stop the global economic decline. The leaders of the
western world are a disaster, whether you view it from the EU, France, Germany,
Japan or the U.S. They are political conmen and women who lie to obtain
power. They don’t tell the truth to get
their policies to work for the average citizen.
The greatest example is the U.S. Democratic proposal
of “Price Controls” which has only made things much worse in any study back to
Roman times when it was first tried.
The state of the world is in decline as the economics
of what helps a nation is forgotten by the voting public and taken for
granted. Therefore, the same mistakes
are made leading to the same poor outcomes.
End Quote:
“Wherever there is great property there is great
inequality. For one very rich man there must be at least five hundred poor, and
the affluence of the few supposes the indigence of the many. The affluence of
the rich excites the indignation of the poor, who are often both driven by
want, and prompted by envy, to invade his possessions.”
― Adam Smith, An Inquiry into the Nature and
Causes of the Wealth of Nations
………………………………………………………………………………………..
Be well, stay calm, success and good luck. Till next
time….
The Curmudgeon
ajwdct@gmail.com
Follow the Curmudgeon on Twitter @ajwdct247
Curmudgeon is a retired investment professional. He has been involved in financial markets since 1968 (yes, he cut his teeth on the 1968-1974 bear market), became an SEC Registered Investment Advisor in 1995, and received the Chartered Financial Analyst designation from AIMR (now CFA Institute) in 1996. He managed hedged equity and alternative (non-correlated) investment accounts for clients from 1992-2005.
Victor Sperandeo is a historian, economist and financial innovator who has re-invented himself and the companies he's owned (since 1971) to profit in the ever changing and arcane world of markets, economies, and government policies. Victor started his Wall Street career in 1966 and began trading for a living in 1968. As President and CEO of Alpha Financial Technologies LLC, Sperandeo oversees the firm's research and development platform, which is used to create innovative solutions for different futures markets, risk parameters and other factors.
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