The Many Minds Of Jay Powell

Just sitting here watching commodity prices take flight … the S&P GSCI is up 1.5%, extending a hot streak that began the day of the December FOMC announcement. WTIC oil bubbling up again, copper turning red hot and gold going for the … well … gold. Stocks not so much, already having front-loaded 20%+ inflation in just four months. This all on top of two straight months of hot final inflation data. Not a bad day at all for those positioned for it …  not a good day at all for Jay Powell.

2024 Jay Powell shoulda listened to 2022 Jay Powell. JP22 openly fretted about asset price inflation, if only using code words like “easy financial conditions” (FC). JP22 informed us that “financial conditions” were a “transmission mechanism” between monetary policy and the real economy. Well … kinda sorta, as we have discussed it at length numerous times in these pages. But the JP22 formulation is close enough for government work. The bottom line is the same either way; asset prices show inflation first, consumer prices later. JP22 had learned a painful lesson about dismissing obvious signs of surging inflation as “transitory”.

JP22 also made subduing inflation Priority 1. He openly allowed for the possibility that the policy required to achieve it might lead to a recession.

JP24 has forgotten all about that. FC no longer matter. It’s “transitory” all over again in every way except the now-banned word. JP23 had imprudently started talking about cutting rates and JP24 doesn’t want to lose face by doing a U turn so soon. It’s easier to stick to the rate cut story and just push the timing out.

But what if that’s not enough? If it isn’t, JP24 only has JP23 to blame. No mere Monday morning quarterbacking; I warned JP23 at the time. JP22 was right to swipe the FC party punch bowl, and JP23 wrong to spike it. JP24 now has a headache.

12 thoughts on “The Many Minds Of Jay Powell

  1. Finster says:

    Some pundits are chalking up JP24’s attitude to it being an election year and wanting to please the incumbents. This too would be an obvious mistake. Even allowing for cracks in the supposedly impervious independence of the Fed, the economic issue du jour isn’t lack of inflation, it’s too much inflation. The public’s sensitivity having already been enkeened, resurgent inflation into Election Day is hardly a winning formula for incumbents.

  2. Finster says:

    Let’s talk about positioning. Wary of further “transitory” surges in official inflation data, I do not like the 1-10 year part of the yield curve. That’s the part that is still holding out for near term rate cuts. Which are in turn based on the premise that recent hot data are a passing “bump on the road”.

    TBill and Chill, a la Financology, is now TBill and Gold. With maybe just a dash of 10-30 year paper (easy ETF trade: SHV+VGLT). Commodities in general likely have more upside, at least until the official stats go too far to dismiss. I don’t think it’s time to throw in the towel on stocks yet, either … VT, which is hovering around the $110 mark at the moment could easily see $120 before $100.

    Two things can end the bull run for stocks. One is when the rate-cuts-are-coming story no longer can be made plausible. The other is when rate cuts actually start.

  3. jk says:

    fedguy joseph wang was sr trader on the ny fed’s desk, and – reading the fed’s “mind”- says their view is that real rates are positive. i.e. 3.5% inflation [so they think] + 0.5% neutral rate = still lower than extant rates. thus financial conditions are tight, or so they think.
    i think we have entered a new regime. the deflationary effects of globalization are being run in reverse, while demographic trends are keeping labor tight.
    i like real assets for this new epoch: uranium, oil and oil services [especially offshore], coal [met more than thermal], pm’s, multi-family real estate, plus high yield credit- floating if possible.
    i’m wary of bonds as we enter an age of financial repression.

    1. Finster says:

      Fed’s “real rate” fantasy is predicated on a far too low rate of assumed inflation. Interest rates live first in the capital markets, where inflation is well into double digit territory. Not to mention well on the way there in the goods and services markets.

      Truly neutral interest rates are at least competitive with rates of return on capital.

      I think “wary of bonds” is the smart default for the next couple of decades. A four decade secular bull market likely ended in 2020. If so that would now put us now in secular bear mode. Possibly even worse given the fiscal outlook. Readers should bear in mind that how to distribute a bond allocation across the yield curve is a separate matter from how much to have in the first place.

      Real assets are the anti-bonds. I still like my land stocks … oil & gas land, gold & silver land, farm land, multifamily, recreation … TPL, RING, SLVP, FPI, LAND, WY, AVB, CPT, FUN, JOE, CTO. I sold CRESY but only because it was creating too many nuisance events (stock dividends, spin-offs) for a modest position, and BHP just because it’s well covered in my ETF Income Portfolio.

  4. jk says:

    fwiw, if anyone is interested, my allocations:
    ~25% steve bavaria’s “income factory”- i’ve thought about this for many years before deciding to make this allocation. bavaria is a credit analyst, and his story is that you can get equity-like returns solely as income, not capital gains, by investing in credit-based closed end funds, business development companies, etc. to my thinking, this is based on a market inefficiency because what he’s investing in is called “junk.” most companies are not investment grade. however people will buy the stock but avoid the credit which sits higher in the capital stack. for a stock to do well, the issuer must “win, place or show” in the race to demonstrate favorable returns. to pay its debt, the issuer must merely “finish the race,” i.e. not go bankrupt. looking at historical failure rates and their associated asset recovery rates for e.g. senior debt, the potential losses even in a recession are small relative to the income generated by a diversified portfolio of this stuff. bavaria runs an advisory service through seeking alpha, about $285/yr iirc.
    ~20% energy, of which 1/5 is in coal [esp amr and hcc], 1/5 in offshore [tdw, val, wfrd, etc], 1/5 in south american oil [gprk, parxf, ptalf – recently moved to these from pbr/a and ec], then a variety of other oil and gas
    ~20% precious metals, of which about 3/4 is phys, the rest is miners
    ~20% value-add multi-family real estate partnerships = eastham
    ~17.5% uranium = sruuf – i won’t invest in the miners here because of operational risks
    i welcome any critiques.

    1. Finster says:

      Thank you for that, JK.

      Your approach to income prompts a broader look at income strategy in general. You can look at investment strategies as either pure nominal income or pure growth or some mix of the two. At the former extreme, you get a flat nominal income; at the latter, you get none.

      But suppose you want an income stream that grows; keeping up with or exceeding inflation. With the former type of assets, you need to set aside part of the income distributions for reinvestment. With the latter, you need to regularly sell off some of the shares to convert gains into income.

      Fixed income assets, from high quality to high yield, BDCs, option based strategies (call writing) in my experience tend to be of the first type. Income can be high but nominally flat, meaning it declines in real terms. In some cases, with especially high yielding assets, it may decline even in nominal terms. If you want to keep the income from declining, you need to reinvest part of it.

      At the opposite extreme, you might have growth stocks. They may pay no dividends at all, meaning if you want income you need to sell off a bit each quarter.

      Choosing between these strategies isn’t a right or wrong kind of thing; it’s a matter of individual preference. And it’s not an obligate dichotomy either; an investor can simultaneously pursue both. This is especially well suited to active, hands-on investors.

      As a lazy-fare investor, my taste leans to a middle ground, in which the investment portfolio mix produces a generous income that grows in excess of inflation without either reinvestment buying or selling off growth assets. I want to assemble a set-it-and-forget-it portfolio of assets and then just withdraw the distributed cash each quarter, neither having to reinvest part of it to stay ahead of inflation nor having to sell off shares to obtain it. And because there is no buying or selling involved, it obviates speculation about the future course of asset prices. This is the aim of the Financology Model Income Portfolios. This strategy too can peacefully coexist with other strategies for income or capital appreciation or preservation.

      I hope this puts the field of investors’ income options into perspective.

    2. Finster says:

      Those gold and silver positions are shooting the lights out again tonight. The mining stocks will when the market opens later today. FWIW the latter are newbie positions for me; just added the mining funds RING and SLVP a few weeks ago. Already well into double digits. How long can it last?

      Bigger picture, as long as the USD keeps going down. This leg up though likely is for a limited time only … possibly the next CPI release. Official acknowledgement of an inflation problem augurs a policy response. And the lack thereof so far is what’s lighting a fire under gold and silver prices.

  5. jk says:

    yesterday i came across a theory that miners won’t perform as well as they have in the past even as gold itself continues to rise. this is based on the observation that paper trading in new york is slowing gold’s advance, and etf’s are showing outflows, even as physical gold in shanghai is trading at a premium. i.e. physical is going to asia, heavily to central banks, and cb’s don’t buy mines. just a thought.

    1. Finster says:

      Sounds like a retrofit to me … a theory cobbled up to predict the past. ISO explanations for why miners have been so badly lagging the metals. CBs may not buy mines but mining companies’ profits are keyed to their minerals’ prices just the same.

      I don’t know. I haven’t been following them that closely. But they do seem to be making up for lost time lately.

      Advisors and investors often treat gold mining stocks as a form of gold. This is a mistake. They’re not kinds of gold, they’re kinds of stocks, and share all the risks that come with the territory. I count them not as part of my gold allocation, but of my stock allocation. I bought them because my land-coms stock group had had none and needed balancing out. A plus is they pay dividends, and prices had fallen to a point where yields were pretty decent … the contrarian in me likes to buy stuff the crowd is down on.

  6. Finster says:

    Latest ISM release shows prices paid continue to accelerate. Mass media continue to hawk the rate cut narrative anyway. Phrases like ‘sticky inflation’ and ‘rate cuts may be pushed back’ are ubiquitous. Inflation is not “sticky”, it’s turned higher, and always assuming that rate cuts are a given.

    How could they know? Not even Jay Powell knows. He only hopes. The reality is no one knows what rates will be in the future. We only know what they are now, and that the Fed wants them to be lower in the future. But remember, the Fed had no clue how high its own policy rate would go in 2022 either. In 2020 Powell was telling us it would stay nailed to zero for years. Even as late as late 2021 they had no clue. Uncontained final inflation was dismissed as “transitory”.

    I can’t be the only one that sees all this storytelling as transparent market manipulation.

    Is it possible FFR will be lower six months from now? Sure. But if it is, stocks will very likely have sold off first. The narrative that stocks will keep flying higher because FFR will fall smacks of a cynical ploy to keep the rabble buying and help Wall Street unload its wares at premium prices.

  7. Finster says:

    Gold and other commodities are on the case. Today’s gold trading was especially impressive … it soared this morning, sold off, then clawed its way back. It’s not just momentum … there’s real demand there.

    That this happened in the midst of a deep Treasury selloff and a plunge in bitcoin is also noteworthy, since these assets tend to be correlated. Watch for ETF inflows to quickly join central bank buying.

    The Treasury selloff extends a trend dating to the final week of last year. Of the major equity markets, only the “emerging” were in the black today, led by China, India and Brazil.