loader image

Thursday in the Danger Room

by | Jan 10, 2023

Dear Reader, 

This morning, the markets continued their sideways pattern after Federal Reserve Chair Jerome Powell made it clear that politics will not interfere in the central bank’s quest to cool inflation. 

Powell said a healthy economy requires an independent central bank, and that its decisions may become unpopular…

“Price stability is the bedrock of a healthy economy and provides the public with immeasurable benefits over time. But restoring price stability when inflation is high can require measures that are not popular in the short term as we raise interest rates to slow the economy,” Powell said. “The absence of direct political control over our decisions allows us to take these necessary measures without considering short-term political factors.”

Hear, hear. The last thing we need is for the White House involved in the monetary policy of the United States economy. We don’t want to make the errors of South American Banana Republics. 

Our Congress would prefer to have that responsibility. Powell’s statements are extremely important. The Central Bank will certainly face criticism in the year ahead, as it leaves interest rates elevated for longer. Let’s discuss what to expect in the year ahead – and why Thursday (a very dangerous day for the market) will be so important this week.

The Fed Isn’t Going “Rogue”

Central banking is unpopular. It’s easy to just cut interest rates and pump the system full of cash to keep everyone happy. Congress has been doing the latter for two years – and driving inflation in the process. 

The Fed, meanwhile, is full of people who understand economics – and occasionally get around to actually practicing this dismal science. 

The Fed has two tools to fight inflation:

It can raise interest rates – which impacts credit, borrowing, and the cost of capital.

It can also sell its assets (bonds, mortgage securities) and drain liquidity from the financial system. 

Both slow down the velocity of money, which helps to quell inflation.

This year, the market is betting that the Fed will cut interest rates on the backside of the third or fourth quarter. The markets think that the Fed wants to avoid a recession. 

The last thing that politicians want – particularly those running the nation – is a recession heading into an election year.

The problem is that cutting rates and buying assets again could cause a repeat of the 1970s. Back then, we saw a big decline in inflation after the first wave of 1973. But after the Fed cut rates, inflation returned with a vengeance, even worse than the previous wave. 

So – to avoid this problem – the Fed says it won’t cut rates this year. And it will move into “restrictive territory” in the year ahead. Things could move into a situation where we see actual deflation at some point this year. 

From my vantage, the Fed has to do what is unpopular. It cannot just pause or pivot unless something really breaks. 

It can slow down the pace of rate hikes, but cutting rates and accommodating this economy will only bring inflation back at a terrifying pace. 

So Powell is saying today: “Listen, we are doing what we have to do to get inflation down. It’s not going to be popular. But it’s our independent decision, and ours alone.”

Politicians will still push trillion-dollar spending bills and the White House will still push for student loan forgiveness. Those actions will be very inflationary because it’s clear that no one seems to understand the source of inflation. 

But the Fed is going in a very different direction. 

If Washington wants to get inflation under control, there are pretty simple policy mechanisms. Politicians can (GASP!) cut spending or even raise taxes. But neither of those mechanisms are popular.

Or… they can INCREASE the supply of energy, food, semiconductors, and other goods through intelligent policy. But that’s too complicated and requires real work.

So the only answer is the blunt hammer of monetary policy – rate hikes, balance sheet reductions, and more speeches than you can shake a stick at.

It’s going to be a long year. And it’s going to get longer on Thursday.

The CPI Number Will Be…

If we think back to December, the CPI number surprised to the downside, sending the market into an epic short-covering rally. At the time, markets expected a number well above the November reading of 7.1%.

Markets are now overcorrecting. They expect that the CPI number will come in at 6.5%. And there’s chatter that month-over-month inflation could have declined by 0.1%. This would be a major feat given the pressure we’ve seen.

That said, the Cleveland Fed is predicting that the CPI will run at 6.6%, which is above expectations. It’s worth noting, however, that the Cleveland Fed has been wrong for three straight months by overstating inflation. So now what?

Well, my take is that this market is now baked in “peak inflation” mode. If, for any reason, this comes in hotter and meets the Cleveland Fed’s estimate, this could send the market into a tailspin rather quickly. 

I’ll be talking about this with Lance Ippolito — who has been on fire this month with his trades — and Don Yocham during the weekly WealthPress Live Roundtable at 11 a.m. ET on Wednesday, Jan. 11 . Here’s your Zoom link to attend: https://special.wealthpress.com/RoundTable 

Be sure to add this to your calendar. We’ll talk about Washington, the CPI and the best trades for the rest of January. 

We’ll be live. Listen to our voices. Look at Lance’s hair. Compliment me for how un-tan I am for being a Florida resident. It’s all here.

To your wealth,

Garrett signature



Garrett Baldwin

P.S. The first person in the chat tomorrow to explain the reference to this subject line at 11:01 a.m. during the Roundtable will receive a complimentary copy of my report: “How to Trade Negative Momentum.”

Market Momentum is Green

It was another good day for our holdings in Tactical Wealth Investor. SkyWest Inc. (Nasdaq: SKYW), a stock I recommended last week here in WealthPress Hub, is charging higher yet again. And our most recent addition to TWI, a fantastic shipping stock, has added another 3%. There’s still time to jump into this stock, which trades for about 20% less its liquidation value and pays a handsome 7.3% in yield. I’ll discuss this and more during the roundtable. 

WRITTEN BY<br>Garrett Baldwin

Garrett Baldwin

What to read next

Have any questions? Contact Our Customer Service Team

Share via
Copy link