Ask the Men on Our Money How Powell Is Doing?

Powell finally admits inflation has been quite a bit higher than the Fed expected to see. Having seen the inflation report, he now says the Fed will be holding for a lot longer:

“We did not expect this to be a smooth road. But these [inflation readings] were higher than I think anybody expected,” Powell said. “What that has told us is that we’ll need to be patient and let restrictive policy do its work….”

It also tells us that none of you have clue about what is happening.

“I do think it’s really a question of keeping policy at the current rate for longer than had been thought,” he said….

“I don’t think that it’s likely, based on the data that we have, that the next move that we make would be a rate hike,” he said. “I think it’s more likely that we’ll be at a place where we hold the policy rate where it is.”

Market’s limply took that to mean, “I guess we won’t be cutting rates in June,” so they increased their bet on a September cut. As a result, stocks went higher, one might say, than the inflation report went (which was pretty high in itself). While Powell didn’t say it, given how dovish his words always are, I’m certain what he really meant was “There will be no rate cuts this year after a report like that one.” The market seems to take it as he was bumping rate cuts one or two more meetings.

Papa Powell clearly did not mean the Fed would be cutting rates in September because he also said, apparently when no on in the market was listening,

“Is inflation going to be more persistent going forward? ... I don’t think we know that yet. I think we need more than a quarter’s worth of data to really make a judgement on that.”

Why would he cut rates in September if he’s letting everyone know the Fed will need more than a quarter of additional data to know whether or not this rise in inflation will be persistent? The market, as always, is being obtusely optimistic.

Powell again did a lot of boasting among his European colleagues about how strong the US economy is, which must have felt quite nice, quoting last year’s best GDP growth while completely sidestepping this year’s much lower growth rate and talking about how resilient the US consumer is—all things that, as discussed here in the last few days are not remotely true, and the news showed clear evidence of that in terms of where the consumer is.

Households are in good shape. They’re not over levered,

Said our financial chief in assessing the condition of the masses as he dabbed the foie gras from his breakfast toast from the corners of his mouth. His collegial audience was kind enough not to notice, just as they they were kind enough not to notice his omission of the slumbering 1.6% real GDP growth rate in the latest quarter.

Powell also talked pleasantly about talked how the huge influx of immigrants the elites had worked into the US is helping eat up some of the excess jobs to keep labor costs under control. (In other times, the government will lie to you and claim that immigrant labor has no impact in suppressing US wages; but now it works better to admit they do.) “They have jobs and they’re consuming, so that is also boosting growth.”

Well, yes, Jerome, it is fair to say that what little GDP growth we did see was entirely because we added huge numbers of immigrants to the nation that are producing in jobs and consuming what they produce. Per capita, what we experience is LESS.

So, overall a good picture, looking at the data so far,

he summarized.

How out of touch can this executive club be?

Powell still sees the labor market as “very, very strong” and recently “overheated,” showing he still believes—in spite of the graph I showed you all recently (see “Truth or CONsequences?”)—that labor has been tight due to high demand for labor, not because, as the graph demonstrated, due to a decapitated labor pool. The nation has brought in millions of immigrants to fill jobs that were going unfilled because the labor pool is so sick and withered for whatever reasons. The graph revealed that full-time jobs are way below their pre-Covid trend, and that trend basically followed population growth; and, yet, we still didn’t have enough people to fill them so we had to import a two-and-half-million immigrants in the last year alone.

The truth about inflation is that it is eating consumers up. Retail’s business reports are coming in this week and Home Depot noted that its business is down because the consumers are at the end of their ropes.

Home Depot on Tuesday posted quarterly revenue below Wall Street’s expectations, as shoppers postponed bigger discretionary projects like bath and kitchen remodels because of higher interest rates and made spring purchases late….

The retailer said it anticipates comparable sales, which take out the impact of store openings and closures, to decline about 1%….

In an interview with CNBC, Chief Financial Officer Richard McPhail said customers are in a waiting game that began in the second half of last year, as they responded to mortgage rates climbing. He said the company anticipated those trends would continue.

That doesn’t sound like the consumer is holding up just fine to me!

Inflation may also be playing a role in that pullback, as consumers spend more money on essentials and have to make trade-offs when spending discretionary income.

However, McPhail said Home Depot is not seeing customers trade down to cheaper items, like less expensive power tools or appliances. He pinned the company’s softer sales in large part on consumers’ “deferral mindset” and a housing market that has slowed dramatically.

How is deferral better? Instead of scaling down, they just are not buying at all! That is what that really says. They have deferred unnecessary purchases indefinitely because they don’t want to accept cheaper quality, so they will hold out as long as they can on buying at all.

Now, if you limit your view to Home Depot, you could say this is more about mortgage interest cutting down housing purchases and, therefore, construction, but the same cut back is being seen in restaurants around the nation. One article talks about a “restaurant apocalypse” that is sweeping the nation. Again it comes down to that “discretionary income” that Home Depot brought up:

When the economy is struggling, restaurants get a lot less traffic and poor performing locations get shut down. Sadly, in 2024 it appears that a “restaurant apocalypse” has started to sweep across America. Most people have very little discretionary income to spend as a result of our cost of living crisis, and that is particularly true for our young adults. Americans under the age of 40 love to eat out, but these days most of them are experiencing financial stress, and this is having an enormous impact on the restaurant industry….

In 2023, visits to sit-down restaurants dropped by about five percent compared to 2022….

Those are dated numbers, and calling it an “apocalypse” may be premature for now, but I’m sure the numbers are worse this year now that inflation is back to rising, and I have evidence to back that up.

Applebees has decided to close another 35 restaurants this year, added to the 46 it shut down last year. Boston Market, having already been through bankruptcy restructuring several years ago, is back to that point again. They’ve applied for bankruptcy protection but have been denied that possibility (maybe due to the timing of their last restructuring?). So, they’ll have to default on their debts with no protection or sell out in a fire sale … or find a really dumb partner with a lot of loose money.

On one side, the declining consumer is a problem, but an equal problem is rapidly rising inflation as a cost problem for producers:

Jessica Dunker, the president and CEO of the Iowa Restaurant Association, said the reason restaurants are shuttering is because the cost of goods is up 30 percent and they are having to shell out higher wages to keep staff on.

Such a good time for all those minimum-wage improvements to have hit. Other reports from the restaurant and foods sector certainly don’t indicate a strong consumer:

Recent earnings numbers from McDonald's, Kraft, and Coke confirm that Bidenomics is turning into a two-speed affair. With plenty of wealth at the top and plenty of pain for normal people….

In short, McDonald's, Coke, Nestle, Starbucks, and Pepsi have all now flagged that low-income consumers are no longer able to absorb inflation.

They're cutting back on visits and they're cutting back spend, leading to a nationwide drop in traffic and sales across fast food and even basic groceries.

I’m guessing, however, the American consumer is strong at all the places where Jerome “Has the sun in his eyes” Powell dines.

It's a whole nother reality on the high-end, where sales are doing fantastic. Molson reported strong growth in pricier beers as more consumers "treat themselves."

More broadly, the luxury ETF LUXX, which includes brands like Hennessy, Hermes, and Ferrari, is actually up 20% in the past 6 months as the wealthy gobble up their Balenciaga and let the poors eat TJ Maxx.

In fact, just a few months ago Lamborghini announced they'd sold 10,000 cars for the first time in history. A third of them in the US….

Ah, life in the fast lane for the rich, versus life in the fasting lane for the rest of us. The founding fathers would be proud. I’m guessing Andrew Jackson wants an upgrade from his place on the now run-down $20 bill.

Bentley also reported record sales, with Aston Martin and Rolls Royce close behind. One analyst summed it up as a "K-shaped economy,” with very different realities for those at the top and those at the bottom, reflected in strong credit card spending at the top paired with rising delinquincy rates for the rest.

Indeed, credit reports certainly don’t show what Powell is seeing as he looks on the bright side by staring into the sun, even though the data comes directly from the Fed. I guess Powell doesn’t spend much time reading his own company reports lately:

Overdue Bills Are Rising With US Debt Delinquencies, Fed Survey Shows

US household debt has reached a record and more borrowers are struggling to keep up….

The data highlight the mounting financial pressures on American families in an age of elevated inflation. The persistent rise in the prices of essentials such as food and rent have strained household budgets, pushing people to borrow against their credit cards to pay for necessities….

Consumers have added $3.4 trillion in debt since the pandemic, and that increased debt bears much higher interest rates….

Consumers facing a financial squeeze may be maxing out their credit cards and falling behind on payments, Fed researchers said. They noted in a blog post that “one observable factor that is strongly correlated with future delinquencies is a high credit card utilization rate….”

Delinquency transition rates increased for all product types, according to the Fed….

Present levels of credit card delinquency are greater than pre-pandemic levels….

The Fed’s report showed 6.9% of credit card debt transitioned to serious delinquency last quarter, up from 4.6% a year ago. And for credit card holders aged 18–29, 9.9% of balances were in serious delinquency….

“An increasing number of borrowers missed credit card payments, revealing worsening financial distress among some households.”

Somebody at the Fed better tell the boss! And maybe get him to an eye doctor.

What was all the fuss about?

Well, there wasn’t as much fuss as there should have been! Powell downplayed the inflation a little, even though he admitted things were a lot higher than the Fed thought they would go. His statement that it will take, at least, another quarter of data to know if inflation is persistent easily translates as, “It will take, at last, another quarter to know whether it is transitory or not.” Right now, he’s staying with rates where they are, which shows his bias is to believe—once again—that it is transitory rather than persistent; so, he’s going to hold. It’s already been clearly rising for four months. If it sticks around another 3-4 then maybe the Fed will start fighting it harder. The timeline sounds familiar.

Markets seemed soothed by his soft talk, but was the rise of inflation really that insignificant? It was reported by CNBC as the largest gain in inflation in a year, which shows, the rate at which inflation is rising has picked up. Kind of like we saw with Powell’s first wish to believe rising inflation was transitory. Since we’re talking producer inflation here, this is the inflation that still has to flow downstream to consumers. So, it clues us into what is coming. PPI for goods increased 0.5% in April—a very large monthly jolt—while Dow Jones was estimating it would only rise 0.2%—so more than double the estimate. Core PPI also rose 0.5%, and services PPI actually rose 0.6%!

“Sticky inflation looked downright stuck this morning after a much hotter-than-expected inflation reading. But with last month’s numbers revised lower, this report may not have been as much of an upside shock as it first appeared to be,” said Chris Larkin, managing director of trading and investing for E-Trade from Morgan Stanley.

Powell focused on the downward revisions to prior months, summarily claiming the report was “actually quite mixed..

Of course he did.

“We’re, of course, disassembling it taking it apart and looking at it.”

Slightly wrong word choice, J-Pow: Dissembling about it would be more accurate.

The bottom line is prices are now rising considerably faster than the rate of rise over the first three months, which already had the Fed feeling a little frustrated with some Fed heads talking about possible rate hikes. This just made that picture more clear. We’ll see what tomorrow brings with the CPI report. That’s where we see what is hitting consumers. Well, not really, because it has been adjusted to death for years, too, but inflation gets to the point where they just can’t arguably hide the truth or those bleeding and baffled consumers will start crying “Powell” in large numbers. There Siri goes again: I wrote “foul,” and she autocorrected it.

If inflation is transitory much longer, it may rise all the way back to where we started before Powell & Co. begin to fight it again. It is looking like an all-to-familiar story.

All of the various inflation measures are showing price pressures well ahead of the Fed’s target.

I have to think, sitting around at home, Powell is a little nervous about how this is going to play out again—whether he needs to fear burning effigies in his yard. He’s going to start facing uncomfortable questions like “How transitory is it this time, Jay?” as people realize that waiting to see if it is persistent is just the flip side of waiting to see if it is transitory. (I might be dreaming on the hope that he’ll be questioned by anyone; the press has learned not to ask questions like that if they want to get called on in school.)

While bad for the consumer, the inflation program seems good for those who bathe in the cream at the top:

The rich will keep getting richer, and everybody else will keep getting inflation, because that's how the Fed works, and it's how crony government spending works.

The Fed's 6 trillion dollar money-printing orgy and the 8 trillion in deficit spending since the pandemic have flooded money to anybody who either already owned assets -- rich people -- or was lucky enough to work at a politically connected company or government contractor.

You can’t have too much inflation if the causes of inflation are putting a lot more money in the right hands. I’m pretty sure that the last time Powell was told the peasants could no longer afford to eat fish, he said, “Then let them eat caviar.”