Will the Fed Crumble Under Pressure?

More evidence that the U.S. consumer and corporate America are hurting … big name investors are predicting a recession … Cathie Wood calls out the Fed … is a “2018” pivot just a dream?

This morning brought disappointing inflation news.

The Producer Price Index (PPI) increased 0.4% in September. That topped the Dow Jones estimate of 0.2%.

On a year-over-year basis, the PPI climbed 8.5%. That was a slight deceleration from August’s 8.7% reading.

For bulls holding their breath for signs of a meaningful reversal in inflation, this won’t do it. Though not a horrendously hot reading, it doesn’t do much to disprove Cleveland Fed President Loretta Mester’s comment from yesterday “there has been no progress on inflation.”

Tomorrow’s Consumer Price Index (CPI) carries more weight. It measures the change in the prices that consumers pay, rather than the PPI, which measures wholesale prices.

The market is wound so tightly that an unexpected CPI print – for good or bad – could send the market soaring or crashing. We’ll keep you updated.

Despite this PPI coverage, regular Digest readers know we’ve urged a change of focus in recent months

Investors should place less emphasis on inflation numbers, and more emphasis on data reflecting the health of the U.S. consumer and corporate bottom lines.

That’s because if we take Fed members at their word, then easing inflationary data won’t immediately result in the Fed Pivot everyone wants.

Fed members appear terrified of resurgent inflation. Because of this, “higher for longer” seems to be their current group-think. But such elevated rates are going to punish the U.S. consumer and corporate earnings. So, monitoring their health directly is critical.

Yesterday, we received another piece of U.S. consumer data to factor into our analysis.

In a report by LendingTree, 32% of adults have paid a bill late in the past six months…and 61% of them said it’s because they didn’t have the money on hand to cover the cost.

From CNBC:

About 40% said they are less able to afford their bills compared with one year ago, the report found. Most said they fell behind on a utility bill, credit card payment or cable or internet bill. 

“Life is getting more expensive by the day, and it’s shrinking Americans’ already tiny financial margin for error down to zero,” said Matt Schulz, LendingTree’s chief credit analyst…

There is no doubt persistent inflation has weighed on consumers, leaving more Americans living paycheck to paycheck.

Meanwhile, the latest news reflecting corporate health isn’t much better

According to a study from KPMG published this week, the overwhelming majority of CEOs across the world see a recession coming – and more than half are considering layoffs.

From MarketWatch:

Nine in ten CEOs in the U.S. (91%) believe a recession will arrive in the coming 12 months, while 86% of CEOs globally feel the same way, according to the findings from the international audit, tax and advisory firm…

In America, half of the CEOs (51%) say they’re considering workforce reductions during the next six months — and in the global survey overall, eight in ten CEOs say the same.

These layoff forecasts appear to be an extrapolation of a current trend.

Challenger, Gray, & Christmas is an executive outplacement service that tracks corporate hiring and layoff data. From Andrew Challenger, speaking to the company’s September analysis:

Some cracks are beginning to appear in the labor market. Hiring is slowing and downsizing events are beginning to occur.

As to those “cracks,” on a year-over-year basis, the number of job cuts rose 67.6% in September compared with 30.3% in August.

The positive aspect of the report is that overall layoff numbers remain low overall, despite the negative directional trend.

Q3 earnings season kicks into high gear tomorrow. We’ll be watching how the numbers come in, and perhaps more importantly, forward guidance.

If all of this makes you think we’re in, or headed into a recession, you’re not alone

Last week, we highlighted legendary trader Stan Druckenmiller predicting a 2023 recession that could be “larger than the so-called average garden variety.” He went on to say “I don’t rule out something really bad.”

Well, on Monday, JPMorgan Chase CEO Jamie Dimon echoed this concern. From CNBC:

JPMorgan Chase CEO Jamie Dimon on Monday warned that a “very, very serious” mix of headwinds was likely to tip both the U.S. and global economy into recession by the middle of next year.

Highlighting nosebleed inflation, soaring interest rates, quantitative tightening, and the Russia/Ukraine war, Dimon said:

These are very, very serious things which I think are likely to push the U.S. and the world — I mean, Europe is already in recession — and they’re likely to put the U.S. in some kind of recession six to nine months from now.

That brings us to another legendary trader, Paul Tudor Jones.

On Monday, Jones said he believes the U.S. economy is either near or already in the middle of a recession. Despite this, Jones is in favor of the Fed continuing with its rate hikes:

If they don’t keep going and we have high and permanent inflation, it just creates I think more issues down the road.

If we are going to have long-term prosperity, you have to have a stable currency and a stable way to value it.

So yes, you have to have something 2% and under inflation in the very long run to have a stable society.

So, there’s short-term pain associated with long-term gain.

But an increasingly number of investors and central bankers are taking issue with the Fed, suggesting it’s about to create an economic bust

Famous technology investor Cathie Wood is one such investor.

For readers less familiar, Wood is the CEO and CIO of Ark Invest. Her flagship fund is ARKK, a disruptive technology ETF that holds a basket of tech stocks including Tesla, Zoom, Roku, Crispr Therapeutics, and Teladoc.

ARKK’s performance has been especially hurt by the Fed’s rate-hiking policy. As you can see in its three-year chart below, after soaring close to 300%, the combination of inflation and higher interest rates took back every single percent of ARKK’s gains…and then some.

Source: StockCharts.com

Earlier this week, in an open letter to the Fed, Wood argued that the Fed is following a rate-hike policy that focuses on the wrong data.

From Wood:

The Fed seems focused on two variables that, in our view, are lagging indicators –– downstream inflation and employment ––both of which have been sending conflicting signals and should be calling into question the Fed’s unanimous call for higher interest rates.

After highlighting the Fed’s three consecutive rate-hikes of 75 basis points, along with what’s likely to be its fourth such hike in November, Wood writes:

Could it be that the unprecedented 13-fold increase in interest rates during the last six months––likely 16-fold come November 2––has shocked not just the US but the world and raised the risks of a deflationary bust?

The threat of such a “bust” is setting the stage for a massive test of the Fed’s resolve

On one hand, you have Paul Tudor Jones basically saying, “this is painful, but it has to be done for long-term growth and health. Time to take our medicine.”

On the other hand, you have Cathie Wood arguing the point “too much hiking, too fast. This has to stop or else it’s going to destroy something.”

What’s going to win?

Right now, it appears the Fed has stuffed its ears with cotton and refuses to consider any signs of pain on either Main Street or Wall Street. But can it keep its resolve?

It couldn’t in 2018.

You may recall the Fed’s rate-hiking campaign that pushed rates up to 2.375%. This was about 75 basis points beyond what Wall Street was expecting.

This prompted the market’s fierce protest that took the form of a 20% tantrum selloff in the S&P from October through Christmas Eve.

That was enough to startle the Fed, prompting a “newfound reluctance” to continue hiking rates.

From CNBC, all the way back in January 2019:

Markets have cheered in recent days as Fed officials indicated a newfound reluctance to raise interest rates…

Worries that the Fed would make a policy mistake and tighten too much were heightened in early October following statements from Chairman Jerome Powell…

In recent days, though, Powell and his colleagues have sought to assuage Wall Street with talk that policymakers will be patient with policy moves and are attuned to the messages coming from markets.

Record-scratch – who is this “Powell” you speak of who is so attuned to messages from the market? No such Powell exists here in 2022.

So far, the Fed has ignored all messages of “pain” that Main Street and Wall Street are sending.

But when could this change? And what degree of pain does the trick?

To date, the Fed has shrugged off the near-collapse of the British financial system… it’s ignored central bank pivots from Australia and Poland… it hasn’t batted an eye at the worst performance for the 60/40 portfolio ever… it’s shown no compassion for the worst bond market since 1842… and it’s turned its back on cries from the international community to slow down on rate hikes…

The Fed has its plan and it’s sticking to it.

This reminds me of the classic Mike Tyson quote: “Everyone has a plan till they get punched in the face.” You have to wonder if the only face-punch that will get the Fed’s attention at this point is a global recession.

If the markets continue to fall, make sure you’re ready to take advantage

In yesterday’s Digest, we put tomorrow’s Zero Hour event with Luke Lango on your radar.

Here’s Luke with more details:

If you follow any of my work, you’ll know that I’ve been obsessed with one thing lately – divergence.

This rare stock market pattern has only occurred three times over the past four decades…

Yet it has consistently produced some of the biggest gains in the history of the markets.

935%, 1,730%, and even 2,150% over time – all possible due to what we’re calling The 1,000% Divergence Window.

Luke is referencing the divergence between an imploding stock price and revenues/earnings that continue growing despite such market pain. This eventually results in a massive “snap back” in price when the divergence window closes.

Tomorrow at 4 PM ET, Luke will be diving into the details of this phenomenon. You can reserve your seat right here.

Bottom line: the U.S. consumer and corporate earnings aren’t headed in the right direction. And so far, the Fed doesn’t appear willing to change course, no matter how intense the pain. But tomorrow, Luke will explain how this could result in what he thinks will be triple digit gains over the next 12 months.

Here’s Luke with the final word:

I know that may sound hard to believe, but I can prove it to you with hard facts and data.

I’ve never been more certain of anything in my entire career.

Click here to reserve your spot for this briefing while you still have time.

Have a good evening,

Jeff Remsburg

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