Economics and Investing: Handicapping the Next Fed Meeting
By Adam Lass
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In this article:
What’s keeping “Helicopter Ben” form carpet-bombing the market with liquidity?
Non-core costs are climbing at 22% per annum.
The stock market is setting records, as Wall Street borrows at 5% and earns 6%.
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So how are your handicapping skills these days? Did you pick Street Sense, Hard Spun and Curlin -- in that order -- for last Saturday’s “Run for the Roses?” Will you have your bets in for the Preakness before the crabs arrive? Does Louis the Leech ask you to set his line on the Belmont?
Then this Wednesday’s FOMC meeting should be a lead-pipe cinch for you. Heck, there’s only three horses running in the first place: “Raise Rates,” “Nothing Doing,” and “Cheap Money,” so how hard could it be?
First, let’s take a look at our “Racing Form,” as it were. Now we know going in, that our main jockey, “Zen Ben” Bernanke has a history of favoring enhanced liquidity, so given his druthers, he’ll favor either doing nothing or even dropping rates a notch.
Economics and Investing: Will the “Deflation Men” Have their Way?
But will he have his preference, or is the track against him this go-round? Let’s try to add up the numbers.
The big factors favoring “Cheap Money” i.e. a rate cut: For starters, if real gross domestic product -- the output of goods and services produced by labor and property located in the United States – were growing any slower, it would be running the wrong way. So far, the first quarter of 2007 has offered us GDP growth at an annual rate of 1.3%. This represents a rough halving of 2006’s fourth-quarter rate of 2.5%.
Add onto the scales the fact that U.S. payrolls added a mere 88,000 jobs in April, making for the slowest growth in two years, and a 25-basis point rate cut might seem like a lock.
Economics and Investing: Rising Inflation Prevents Any Serious Cutting
However, on the other side of the equation, we have something that looks suspiciously like inflation. For the first three months of 2007, consumer prices increased at a seasonally-adjusted annual rate (SAAR) of 4.7%, roughly double 2006’s final figure of 2.5%. Rough, but still manageable.
And then there are those “volatile non-core” item energy costs, which are accelerating around the track at a neck-snapping 22.9%, almost ten times 2006’s 2.9%. Groceries increased at a 10% annual rate.
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Especially bad news for those who are trying to get in shape for the summer: cereal and bakery products are growing at 4.7%, but fresh fruits and vegetables are cranking up the heat at 19.3%.
Wow, suddenly “Raise Rates” is coming on strong as they round the corner and head into the backstretch!
Economics and Investing: Nothing Doing So Far…
Can’t sort out how it will all finish out? I’ll give you a clue: When the current Fed Chairman was a mere academic, he was famed for stating how he would be inclined to airdrop cash onto an ailing economy (thus his old moniker, “Helicopter Ben”).
But since he stepped up to the big seat, he has become far less inclined to do or say anything that could be construed as activist in anyway, shape or form. Rather he has favored removing even hints of future moves from official statements, for fear of disturbing the balance of animal spirits.
Indeed, so far during his occupancy (reign just sounds too, well, muscular), the Fed has executed two minor changes slated by his most-activist predecessor, Alan Greenspan.
And after that, nothing, nada, zilch. An occasional hint that things might not be great always counterbalanced by a clear statement that this does not mean that they are thinking of doing anything.
This does not exactly stink for our own little Buddha’s friends on Wall Street, who are borrowing at roughly 5% and earning something around 6%. The end result is a stock market that is quietly racking up record advances on what amounts to a semi-legal carry trade.
So in the end, both frontrunners will crash into the rail, leaving “Nothing Doing” free and clear as he crosses the finish line. In other words, no rate increase Wednesday, and prices will continue to rise until someone squeals for mercy.
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Adam Lass is the founder and manager of the WaveStrength Group, and is a contributing editor for Taipan Financial News. As the creator of WaveStrength’s proprietary analysis system, Adam’s expertise has shaped a franchise of successful investment newsletters and services, including WaveStrength Options Weekly and WaveStrength Apex.
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