August 28, 2022
Friday’s sharp 1,000 point decline was triggered by Fed Chairman Powell’s brief, but pointed, “inflation fighting”comments at the annual Jackson Hole, Wyoming economic meeting of the world’s financial elite.
Fighting Inflation was job number one, for the Fed at this time, said Powell, even if it leads to some short term economic pain.
That is not what the stock market gurus wanted to hear. For the past five weeks, the stock market, and the Bitcoin markets, have had significant rallies, on the assumption that “inflation had peaked” and that the Fed would “pivot” from this interest rate cycle, to prevent a serious economic slowdown, as they had in 2019.
It would appear that “reality” set in on Friday, that this time the Fed was really, really, really serious about combatting inflation.
The problem that I see is that the inflationary forces that have been unleashed over the past years, are the result of many bad economic decisions by several recent administrations. You cannot have a strong military, fight wars around the world, and provide needed government services, without the necessary tax revenue.
For too many years we have allowed the national budget deficits to grow without being addressed by serious political debates. The truth is that the politicians do not wish to address the fact that the only real solution is to curb spending and raise taxes and close tax loopholes that have been inserted into the tax code.
In particular, to paraphrase an economic dictum from an earlier period: The claim that Tax Cuts pay for themselves though increased economic activity. This theory did not work in the 2000’s and it is not working now.
I think that Friday’s negative stock market response may be the beginning of a retest of the stock market lows of June.
Although I see rough days ahead, I think we may see relative strength in two sectors: Energy and Agriculture, because of weather and war factors.
However, another week like the past week, might get the Fed to suddenly remember that “monetary stabiity” is also part of their mandate.
It is also worth noting that China’s central bank is taking the opposite approach to that being taken by the US Fed. They are pouring large amounts of stimulus money trying to recharge their faltering economy and the implosion of their property and real estate markets, with little concern about inflation.
Although these personal observations are not investment advice this might be a good time to, “Fasten Your Seat Belts.”