Federal Reserve Chairman Jerome Powell spoke and the market didn’t like what it heard.
“Powell basically told you the Fed put is dead,” was hedge fund titan David Tepper’s assessment of the chairman’s prepared remarks delivered on Wednesday, following the Fed’s scheduled two-day policy meeting.
“Everything is tight. Chinese money growth is plummeting. ECB cutting the last of QE. And Fed still in tightening mode.”
True, monetary conditions are tightening. But are the days of the proverbial Fed put — the Fed’s tacit commitment to support stock prices with easy money in times of turmoil — really over?
Hard to believe.
Equity markets were calm, even optimistic, going into this week’s policy announcement. However, sentiment changed abruptly on Wednesday following Powell’s announcement of a 25 basis point increase in the Federal Funds Rate, with two additional hikes planned for 2019.
The selloff continued through the rest of the week with the Dow Jones Industrial Average losing over 500 points on Thursday to reach a 14-month low. The NASDAQ entered bear market territory, dropping to 6333 on Friday. The Dow Jones Industrial Average and the S&P 500 monthly performance reached the worst point since October 2008, with the latter on pace for the worst December since 1931.
The stock volatility and weakening dollar boosted precious metals. Spot gold jumped over 1% on Thursday to reach its highest price since July. Silver also rose, hitting a high of $14.82 per ounce, before falling back on Friday to $14.68.
THEY HAVE NO EMPATHY
No shortage of criticism has followed Wednesday’s decision. The Fed’s change in direction, though dovish on the surface, was clearly not dovish enough to please critics, such as DoubleLine’s Jeffrey Gundlach, who criticized Powell’s robotic approach to unwinding the central bank’s balance sheet.
Jay Powell made two mistakes today at the presser:
“The Fed is perfectly happy to gradually strangle the economy, the U.S. economy, in order to stamp out inflation, or the potential of inflation. And that’s bad news for corporate earnings.”
“Powell’s the one who’s wrong. His apologists have no sense of empathy for what’s about to happen to the working man.”
“[Janet Yellen] would have been a lot more prudent and a lot less reckless with these plans.”
But what Cramer believes is going to happen to the working man has already happened.
THE BIG INFLATIONARY LIE
Cramer believes that by removing the punch bowl just as wage rates are showing signs of rising, Powell is delivering a blow to the average worker. What he doesn’t understand is this damage was done long ago by people, such as Yellen, who are long gone.
Low interest rates benefit those who can borrow. Central bank asset purchases benefit those who own assets.
Neither policy benefits the poor paycheck-to-paycheck employee.
And since accommodative action by the central bank only raises wages after asset prices have already responded, the average person is far too late to the inflationary party to capitalize — they are last to the monetary buffet.
Yet, the experts insist the easy money policy is beneficial, even essential.
THE ‘STRONG ECONOMY’ MYTH
Economists want us to believe that all is fine — the economy is strong.
In Powell’s assessment, the economy has performed well in recent months while inflation remains low and stable. As economic growth continues, he expects wages to rise gradually and welcomes the trend. And, although some economic cross-currents exist, the Fed is confident in continuing its rate hiking exercise, albeit at a reduced rate.
Yet, despite his optimism, a wild presidential tweet or disappointing Fed policy statement is all it takes to send markets tumbling.
Something doesn’t add up.
THE FED PUT IS HERE TO STAY
Despite the Fed chairman’s tough talk and the market’s mini-tantrum, nothing has really changed. True, the Fed’s policy options are fewer than in prior years — it surely cannot waste policy bullets on every garden variety 500-point decline. Nevertheless, trust that when (not if) things get really bad, Powell and his cohorts will be back with their easy money — the only cure they know.
The put is not dead. The real question is: Will it work again?
Sprott U.S. Media, Inc. is a wholly owned subsidiary of Sprott Inc., which is a public company listed on the Toronto Stock Exchange and operates through its wholly-owned direct and indirect subsidiaries: Sprott Asset Management LP, an adviser registered with the Ontario Securities Commission; Sprott Private Wealth LP, an investment dealer and member of the Investment Industry Regulatory Organization of Canada; Sprott Global Resource Investments Ltd., a US full service broker-dealer and member FINRA/SIPC; Sprott Asset Management USA Inc., an SEC Registered Investment Advisor; and Resource Capital Investment Corp., also an SEC Registered Investment Advisor. We refer to the above entities collectively as “Sprott”. The information contained herein does not constitute an offer or solicitation by anyone in any jurisdiction in which such an offer or solicitation is not authorized or to any person to whom it is unlawful to make such an offer or solicitation. Forward-Looking Statement This report contains forward-looking statements which reflect the current expectations of management regarding future growth, results of operations, performance and business prospects and opportunities. Wherever possible, words such as “may”, “would”, “could”, “will”, “anticipate”, “believe”, “plan”, “expect”, “intend”, “estimate”, and similar expressions have been used to identify these forward-looking statements. These statements reflect management’s current beliefs with respect to future events and are based on information currently available to management. Forward-looking statements involve significant known and unknown risks, uncertainties and assumptions. Many factors could cause actual results, performance or achievements to be materially different from any future results, performance or achievements that may be expressed or implied by such forward-looking statements. Should one or more of these risks or uncertainties materialize, or should assumptions underlying the forward-looking statements prove incorrect, actual results, performance or achievements could vary materially from those expressed or implied by the forward-looking statements contained in this document. These factors should be considered carefully and undue reliance should not be placed on these forward-looking statements. Although the forward-looking statements contained in this document are based upon what management currently believes to be reasonable assumptions, there is no assurance that actual results, performance or achievements will be consistent with these forward-looking statements. These forward-looking statements are made as of the date of this presentation and Sprott does not assume any obligation to update or revise. Views expressed regarding a particular company, security, industry or market sector should not be considered an indication of trading intent of any fund or account managed by Sprott. Any reference to a particular company is for illustrative purposes only and should not to be considered as investment advice or a recommendation to buy or sell nor should it be considered as an indication of how the portfolio of any fund or account managed by Sprott will be invested. Past performance does not guarantee future results. The views and opinions expressed herein are those of the author’s as of the date of this commentary, and are subject to change without notice. This information is for information purposes only and is not intended to be an offer or solicitation for the sale of any financial product or service or a recommendation or determination by Sprott Global Resource Investments Ltd. that any investment strategy is suitable for a specific investor. Investors should seek financial advice regarding the suitability of any investment strategy based on the objectives of the investor, financial situation, investment horizon, and their particular needs. This information is not intended to provide financial, tax, legal, accounting or other professional advice since such advice always requires consideration of individual circumstances. The products discussed herein are not insured by the FDIC or any other governmental agency, are subject to risks, including a possible loss of the principal amount invested. Generally, natural resources investments are more volatile on a daily basis and have higher headline risk than other sectors as they tend to be more sensitive to economic data, political and regulatory events as well as underlying commodity prices. Natural resource investments are influenced by the price of underlying commodities like oil, gas, metals, coal, etc.; several of which trade on various exchanges and have price fluctuations based on short-term dynamics partly driven by demand/supply and also by investment flows. Natural resource investments tend to react more sensitively to global events and economic data than other sectors, whether it is a natural disaster like an earthquake, political upheaval in the Middle East or release of employment data in the U.S. Low priced securities can be very risky and may result in the loss of part or all of your investment. Because of significant volatility, large dealer spreads and very limited market liquidity, typically you will not be able to sell a low priced security immediately back to the dealer at the same price it sold the stock to you. In some cases, the stock may fall quickly in value. Investing in foreign markets may entail greater risks than those normally associated with domestic markets, such as political, currency, economic and market risks. You should carefully consider whether trading in low priced and international securities is suitable for you in light of your circumstances and financial resources. Past performance is no guarantee of future returns. Sprott Global, entities that it controls, family, friends, employees, associates, and others may hold positions in the securities it recommends to clients, and may sell the same at any time.