Making Sense of a Bumpy Road

More than just a bump in inflation?… Jerome Powell says it’s too soon to say… We’ve heard this before… The Fed chair on why a recession didn’t happen in 2023… Immigration… ‘A bigger economy, but not a tighter one’…

Jerome Powell is disputing inflation again…

Over the past two days, I (Corey McLaughlin) have pointed out that the Federal Reserve’s preferred inflation gauge ran at a nearly 5% annual rate through the first two months of 2024.

Yes, 5%. If that sounds far from the Fed’s 2% target, we concur…

However, Fed Chair Jerome Powell gave a keynote speech at a conference at Stanford University today and, in prepared remarks, said…

On inflation, it is too soon to say whether the recent readings represent more than just a bump.

Now, to be fair, it is too soon to say… Two months is admittedly a small sample. But the inflation numbers have been high enough to push back Fed rate-cut expectations further into the year (again). Futures traders are now betting on June at the earliest.

Haven’t we seen this story before?

Like when inflation was supposedly “transitory” in 2021? (It wasn’t.) Or when European Central Bank President Christine Lagarde described inflation back then as a “hump” that would go down in 2022? (It didn’t… and it grew into a mountain.) Or how about when people were banking on a Fed and central bank “pivot” throughout 2022? (It never came… A bear market happened instead.)

Or consider what we’ve seen for much of the past four months… Powell has promised cuts this year and doubled down on the idea again today, saying the fed-funds rate is “likely at its peak for this tightening cycle.” Yet market expectations for them to actually occur have only been pushed back and back and back…

There’s a trend in progress here… It’s wise to pay attention to it.

A hawk’s view…

Earlier today, Atlanta Fed President Raphael Bostic got his monetary-policy feelings off his chest – and it sounded a lot like an outlook not quite “priced in” to the market yet.

In an interview on CNBC, Bostic – who is one of the more “hawkish” (inclined to favor tighter policy) Fed members and, importantly, not the Fed chair – said strong productivity, a rebound in the supply chain, and a resilient labor market tell him that inflation is going to decline “much slower than what many have expected.”

So we have a voting member of the Fed’s policy committee saying the current environment might result in just one cut this year, sometime in the fourth quarter. According to the CME Group’s FedWatch Tool, only about 20% of fed-funds futures traders are betting on that scenario today… which means room for expectations to adjust, or volatility. Bostic said…

If the economy evolves as I expect, and that’s going to be seeing continued robustness in GDP, unemployment, and a slow decline of inflation through the course of the year, I think it would be appropriate for us to start moving down at the end of this year, the fourth quarter… We’ll just have to see where the data come in.

Bostic then acknowledged what we’ve been saying the past two days about a rebound in the Fed’s preferred inflation gauge, saying…

The road is going to be bumpy, and I think if you’ve looked over the last several months, inflation hasn’t moved very much relative to where we were at the end of 2023. There are some secondary measures in the inflation numbers that have gotten me a bit concerned that things may move even slower.

About the labor market…

Today’s widely followed report on the jobs market from payroll company ADP did nothing to dispute Bostic’s take. The company said U.S. private-sector employment rose by 184,000 jobs in March, above Wall Street expectations of 148,000.

Pay gains for job changers also rose by an average of 10%, with the biggest gains coming in manufacturing, construction, and financial services.

Friday’s “nonfarm payrolls” report for March, complete with an updated unemployment rate, will contribute to the labor market picture even more.

Powell on the jobs market and immigration…

Powell also shared a few interesting takes on the jobs market today that we hadn’t heard from him before.

When asked on stage in a Q&A session about the labor market, he said that a rebound of the supply side in general in the economy… plus a “significant bump” in immigration into the U.S. in 2023… were big reasons why the economy grew by about 3%, according to GDP, while interest rates went from near zero to around 5%. Powell said…

[In 2023, you had] a situation where productive capacity is going up even more than actual output. The economy actually isn’t becoming tighter… It’s actually becoming a little looser, and you’re seeing inflation come down. Very unusual situation. The pandemic has been a textbook of unusual, unexpected developments and situations.

That really is the story… The question is: How much more are we going to get out of the supply-side recovery?… We just don’t know the answer…

Our economy has been short labor, and probably still is… It’s still difficult to hire for many, many companies… What happened over the course of last year is, to a much greater extent than had been thought, immigration moved up quite a bit over the last two years…

Powell talked about how he was basing this analysis on a Congressional Budget Office report that surveyed immigration officials on the border and found 3.3 million net immigrants arrived in the U.S. in 2023, compared with 1 million projected prior to the pandemic. Powell said…

That actually explains what we’ve been asking ourselves… Almost every outside economist was forecasting a recession for 2023… Not only did that not happen, we had better than 3% growth. Really a remarkable performance. Some part of that is there are significantly more people working in the country, but then how does inflation come down? It’s because potential capacity of the economy has actually moved up perhaps more than the actual output.

It’s a bigger economy but not a tighter one – an unexpected and unusual thing. We don’t make judgment calls, but that’s what we’re seeing.

So that’s why he hasn’t taken credit for the “soft landing.” Because he didn’t see it coming.

In the end…

The Fed has kept interest rates where they are since last July. And central banks around the world are projecting lower rates by the end of the year. I’m becoming more skeptical that will actually happen, but I could be wrong.

So let’s repeat an idea from yesterday…

A continued “Fed pause” could be good for stocks…

That’s as long as most investors believe that the end result will be rate cuts, as Fed Chair Jerome Powell has promised. That appears to be why stocks have churned higher even as market expectations for cuts keep moving further into the future.

But if prevailing expectations that the central bank’s next move to cut rates shifts to the thought that it might raise them first (because of higher inflation), it would be a dramatic change – and probably cause volatility for more than a day or two.

We’re not there yet. After two straight down days for the major U.S. indexes to start the week, they were up today. Yet, curiously, so were inflation hedges like the energy sector and gold. Treasury yields were up slightly, too.

Finally, a big moment for cryptos is coming…

We’ve reported on the bull market in bitcoin and other cryptocurrencies through the first quarter of this year, and we told you to expect more analysis from our Crypto Capital editor, Eric Wade, and his team…

Well, it’s about that time…

Next week, Eric will be going live with a new, free presentation with his latest update on all things cryptocurrencies.

He plans to explain the details about a “reboot” in bitcoin that will happen later this month… which could push the price of the world’s most popular crypto to $100,000… and send the prices of other small “altcoins” soaring by thousands of percent.

If you’re interested in cryptos at all, or even if you haven’t been but want to get up to speed, this a must-watch event…

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Register now here to make sure you don’t miss anything.

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In today’s mailbag, feedback on yesterday’s Digest about something that doesn’t add up when it comes to the Federal Reserve… and more thoughts on the Baltimore bridge collapse and response… Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.

“Corey, basically we are looking at a money cartel, control.

“The Creature from Jekyll Island explains it nicely. They, the Fed, know what they are doing. They say ‘Oh, cuts are coming,’ just to avoid panic. But they realize like a bank making bad loans it isn’t working. The train is going downhill and has lost its brakes.

“There is no way out unless they approach the sinkhole of that Rotunda Entrance where the political relief fund is activated and they award invisible funds to whoever wants them and forward the bill to us the taxpayer, creating what today you correctly termed as more inflation.

“Thus bringing the dollar to a form of microworth (new word) till, like Dan talks about, the bubble that breaks.

“The author from the book referenced above also at one point stated kind of, ‘Those that pay interest don’t collect it.’

“Those in charge of the Fed really aren’t the government. They are a private entity though in partnership with the government, as you know. Split into branches with hundreds of overpaid analysts quickly pushing our lives towards the fate of the German Mark.

“I only wish people paid attention to what you are sharing with them daily. To me, it would be advisable.” – Subscriber Jeff B.

“There’s no common sense that says the U.S. should bear the cost of replacing the bridge. It’s to the account of the shipping firm and their insurance. NO taxpayer money – not one penny.” – Subscriber Larry W.

“I had to chuckle at subscriber Bill B.’s comment on who should pay the clean-up bill. I have learned a lot the last few days about maritime laws which pre-date the U.S. Ultimately, the city/state/feds will pay for it in the short term. Long after that, and long after we forget about the incident, some courts will figure it out; my bet is on maritime laws, and it will be a blip in the news.

“Maritime laws, only older and more steeped in tradition, are like the water rights laws of the western states. People think they can or should have water for certain uses, like drinking it, yet water rights older than the states they are in will be near impossible to change or overcome. Maritime law is [what] people ought to be reading up on.” – Subscriber Don B.

“There’s an old accounting adage, ‘figures don’t lie, liars figure.’ I have a strong feeling that the politicians and bureaucrats involved with addressing the [Key Bridge collapse in Baltimore] disaster are not telling the truth; either on purpose or out of ignorance.

“The ultimate number to address this disaster will probably be much higher than the current projections say, and the time to clean up and build a new bridge will probably be much longer than what the government is currently saying.

“Beyond that, I don’t even think the government is thinking about [what] the other future economic effects of this disaster will be. For one thing, there has been manufacturing along the river for almost 200 years. I don’t think anyone has a real idea of what has been dumped into the river over those years.

“When the debris is removed and the construction of the new bridge begins, the silt from the river bottom will be churned up. Whatever is in that silt will flow down the river and into the Chesapeake Bay. This will affect the fisheries in the bay and the watermen who make their livelihood from those waters.

“Having lived in New York when the [U.S. Army] Corps of Engineers began dredging the Hudson River and the effects it had on the marine life and the environment, there is no way that I would consume anything that came out of the bay until real scientists had a chance to study the effects.

“What will happen to the people who make their livelihood off the bounty of the bay, but also all the restaurants and people that work in them, if the supply of crab and oysters is sharply cut back, if not completely cut off?

“Just wondering if anyone will ask the city and state leaders to address these potential issues.” – Subscriber Scott M.

All the best,

Corey McLaughlin
Baltimore, Maryland
April 3, 2024