Uncertainty about the macro environment was the dominant theme at Mauldin Economics’ virtual Strategic Investment Conference (SIC) in early May. With employment still strong—six million Americans continue to look for work and 11 million jobs are available—Federal Reserve Chairman Jerome Powell is likely confident that the central bank could raise interest rates without harming the strong job market. At least that was the feeling of Jim Bianco of Bianco Research in Chicago.
Bianco attributed America’s inflation problem to its successive monetary and fiscal stimulus programs.
Inflation is global, but “why is the U.S. No 1?” Bianco asked, saying America’s inflation rate outpaced that of other nations by 3%, largely because its massive government programs dwarfed those of other nations.
Powell is still likely concerned about the conditions faced by less successful Americans, people who haven’t participated in the explosion of asset prices, Bianco said.
“Forty percent of the American public rents and has less than $1,000 in savings,” Bianco added. These folks “are getting killed by inflation and they are very mad.” If tackling that inflation means hurting the portfolios of wealthier people, the Fed will likely say, so be it. After all, 100% of the U.S. population has been affected by inflation, he said. And most equities are owned by America’s most affluent citizens, who can best afford to take a hit for the team.
The feverish housing market is one harbinger of the inflationary situation, Bianco said. Before Covid-19, only about 20% of homes in America were sold above the asking price. Over the last two years, that figure has surged to 55%. He said real estate agents, normally hired to get a fair price for buyers, have failed to understand how strong demand is among many buyers. (Prices in numerous markets besides housing, like food and energy, have also been influenced by a lack of supply.)
While housing may be collateral damage in the Fed’s quantitative tightening strategy, Bianco said the central bank’s primary target is the stock market since stocks are the “fastest” way to attack inflation. He cited an April 6 article by former New York Fed CEO William Dudley calling on the Fed to force a stock selloff or even a bear market. Dudley no longer speaks for the Fed, but his status as a powerful former governor provides insights into central banker thinking.
Several Mauldin conference speakers said Powell wants to avoid being remembered by history as another Arthur Burns, the Fed chairman whose easy monetary policies gave birth to hyper-inflation in the 1970s.
Critics say the Fed’s mandate should have nothing to do with stocks and that the central bank should be concerned instead with the dual problems of stabilizing inflation and employment.
But in reality, the stock market probably is the easiest target for the Fed to implement its goals with the least damage. At equities’ peak at the end of 2021, they had climbed more than 95% in the 21 months since their March 2020 lows, or the equivalent of 95% of GDP, Bianco noted. The euphoria has led market participants into delirious behavior, from meme stock purchases of AMC and GameStop to SPAC IPOs to hedge fund leveraging schemes, like that of Bill Huang’s Archegos Capital Management. The feverish activity has people recalling Alan Greenspan’s “irrational exuberance” warning of 1996, he said.