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June
16
2023

What Exactly Happened Today?
Brian Maher

The stock market enjoyed itself a day at the races today.

The Dow Jones Industrial Average experienced a 428-point jubilation. The S&P 500 posted a 53-point thrill.

The Nasdaq Composite, meantime, leapt 156 points today.

This, one day following the Federal Reserve’s sledgehammered hints that two additional rate increases are in prospect this year.

Affirms Yahoo Finance:

“Stocks rallied on Thursday as investors shrugged off the Federal Reserve’s “hawkish hold,” which implied more rate hikes are possible later this year.

Why did investors shrug their shoulders? Why did stocks visit the racetrack?

Answers the same Yahoo Finance:

Investors digested a rush of economic data on Thursday which showed the economy continues to perform better than feared, particularly when it comes to consumer spending…

The weekly report on initial jobless claims showed some softening in the labor market, while retail sales beat expectations and manufacturing activity showed signs of resilience.

Yet here we confess to a central confusion. It begins here…

The Fed Remains Committed to Destroying Inflation

Mr. Powell and mates are fantastically resolute to rinse inflation out of their hair.

These Federal Reservists are the designated stewards of the United States dollar — after all.

The inflation embarrasses them because it reveals a great degree of professional underperformance.

Expressed more boldly, of professional incompetence.

Inflation puts out its tongue at them. It pulls their noses.

“Catch me if you can!,” it taunts them. This, as it runs its circles around them and dodges their grasps.

And inflation… though partially subdued since last June’s peaking… continues its jests.

The Federal Reserve is out to cram the jack back in its box — to end the mocking and show inflation “who is boss.”

Yet the Federal Reserve has hung itself upon the hooks of a grand dilemma…

The Fed Walks a Tightrope

If the Federal Reserve elevates interest rates with berserker abandon they entertain the risk of clubbing the economy.

They would increase interest rates “until something breaks.”

At that point they would be compelled to abandon their anti-inflation jihad.

They would necessarily redirect their attention to repair work… and attempt a fix of what they had broken.

In practical terms they would be compelled to reduce the interest rate — and permit inflation to continue its sprees.

Wall Street would shake with joy at this liberalization of Federal Reserve policy.

Easing financial conditions, after all, are good for it.

It prospers under these easing conditions. Hence our confusion attending today’s market doings…

Nothing Broken Yet

Please suspend your jaundiced and well-justified disbelief for the moment. And assume the latest economic data is, by some miracle of God, accurate. Now consider:

Healthy economic data informs the Federal Reserve that its anti-inflationary rate increases and quantitative tightening have yet to “break anything.”

Or rather, what it has broken… it has already repaired.

There was the run of bank failings beginning in March. Yet the Federal Reserve believes it has gotten its hands upon the problem.

It believes it has caged this tiger. It believes the menace is scotched.

Now it is told that the economy hums along in high gear. It hears, for example, Reuters coos that:

Economic data showed U.S. retail sales rose 0.3% in May, above expectations for a 0.1% decline while weekly initial jobless claims were unchanged from the prior week at 262,000 and above the estimate for 249,000. That suggested the labor market may be showing signs of loosening…

The Federal Reserve is further soothed and solaced by comments such as these, issuing from a certain Oren Klachkin of Oxford Economics:

Defying expectations, the headline May retail sales print shows that consumer spending remains resilient. It has been tough trying to predict the start of the recession, but… the recession will be delayed as long as consumers continue to spend.

A Green Light for Additional Hikes

What cardinal fact does the foregoing reveal?

The Federal Reserve has not only failed to break something — in its estimation at least.

The consumer spending data actually writes the very warrant for additional rate hikes!

The consumer is spending money. What constitutes inflation’s fuel? Spending.

Now the Federal Reserve believes the inflationary foe is receiving reinforcements and preparing offensive action.

What is the Federal Reserve to do… save declare additional rate increases?

Again, two additional rate increases are already in prospect this year. The consumer spending data merely elevates their odds.

And so the Federal Reserve can safely proceed. But consider…

Shouldn’t the Market Have Tanked Today?

Who is against additional rate increases? That is correct — Wall Street is against them.

And yet we are informed that the stock market was up and away today on the wings of rambunctious economic data.

Should not the stock market have swooned today — on the reinforced prospects of additional rate increases?

There you have the source of our muddlement.

We have long cherished the “bad news is good news” theory.

That is, the theory that bad news for the economy is good news for Wall Street — and that good news for the economy is bad news for Wall Street.

The Federal Reserve would reduce the interest rate when economic gloom prevailed, to Wall Street’s advantage.

Meantime, the Federal Reserve would not reduce the interest rate when times were flush.

This theory was very heavily validated during much of the previous decade.

Time and time again the stock market ebbed or flowed along these lines.

Today’s stock market activity trounces our lovely theory.

Yet we should not be one whit surprised.

Rich at Last!

We find the stock market a nearly infinite source of muddlement, of confusion.

Just when we think we may finally have the thing by the tail… it slips our grip.

Fresh questions arise, fresh doubts arise. Fresh insights likewise arise — fresh insights subsequently made stale.

We are once again at sea.

Market history informs us with 98.43985% certainty that “X” will occur at a certain time.

What in fact occurs in the vast majority of instances?

Not “X.” That is, the 98.43985% certainty becomes the 0% reality.

What in fact occurs is often “C,” “L,” Q,” “S,” or any other 25 letters of the alphabet.

Any, that is, but “X.”

How many times have we been made monkeys of?

Here we resort to the Fifth Amendment to the United States Constitution. We refuse to answer.

Yet you can be assured they are numerous.

We nonetheless cling resolutely to an optimistic belief…

On some distant tomorrow… perhaps 437 years from today… or 4,370 years from today… or 4,370,000 years from today… we will finally penetrate the stock market’s mysteries.

On that day, finally, we will be rich.

 

 

Brian Maher is the Daily Reckoning’s Managing Editor. Before signing on to Agora Financial, he was an independent researcher and writer who covered economics, politics and international affairs. His work has appeared in the Asia Times and other news outlets around the world. He holds a Master’s degree in Defense & Strategic Studies.

 

 

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