VRA Investment Update: J Powell, the Jim Cramer of Fed Chairmen. Upside of Inflation. The Markets Love it When the Fed Stops Hiking.

Good Thursday morning. In Tuesdays Letter I wrote the following…

“J Powell is the most unpredictable Fed Chair of our times and the root of his unpredictability lies in the fact that he desperately wants to be taken seriously. Powell is highly unpredictable. That’s a dangerous trait in a Fed Chair.
And that means anything could happen tomorrow during his presser, which is why we won’t be surprised to see volatile trading over the next couple of days. It’s likely why the markets gave up their gains in yesterdays trading. 

Yesterday's FOMC statement and Powell presser proved my points better than I could have hoped for. Powell began by saying “the banking system is sound” and throughout his presser and Q&A went back to that well often, making it clear that he and his money printing inflation-lords at the Fed believed that “the regional bank crisis has been handled”, clearly implying time and again that bank failures were in their rear view mirror.

WOW: Within mere minutes of making these statements both the BKX (large bank index) and KRE (regional bank ETF) hit fresh 52 week lows. Folks, this is the market giving the ultimate FU to Powell. 

WOW #2: Then, within minutes of the Fed’s presser ending, PacWest announced that they were exploring their options…that they too are for sale. PACW share price then fell more than 50%, falling to a new low of $2.55/share. 

And once again, the markets tanked once Powell started speaking with the markets finishing at their lows of the day. This adds supporting data to the facts that we already knew; on Fed presser day, Powell is the worst performing Fed Chair in history. Short sellers are (without question) trading this. 

Powell is the Jim Cramer of Fed Chairs. Please know that the reason we point out Cramers poor reputation actually has very little to do with his stock picks (he’s reported to have beaten the markets just 2 x in the last 20 years) but has everything to do with Cramers bizarre statement during coronavirus insanity that “every American should be forcibly vaccinated (against their will) using the US military to give the injections.” Jim Cramer, the Wall Street Nazi…

I also wrote this on Tuesday, following my warnings about Powell;

“Of course in the bigger picture, this weeks Fed meeting should not matter. The economy is slowing (but man have these Q1 earnings been good), we’ve had disinflation for 7–8 months and the Fed is nearing a “pause and pivot”. We see it clearly in a 10 year yield of just 3.55% while the Fed funds rate will hit 5.25% tomorrow. The markets are screaming at the Fed to pause and pivot. 

More importantly for us, we have a new bull market to boot. A bull market that continues to climb a wall of worry. We remain long and strong…buyers on dips…looking for significant gains in 2023. “ (end)”

Corp Earnings and US Economy Remain Solid; Yes, Inflation Has its Upside

This is a topic that I’ve wanted to write up for some time. In our new book “The Big Bribe” we outlined the financial engineering taking place that will send the economy and markets sharply higher into 2030. Inflation is part of that financial engineering. Inflation is a term used to describe the general increase in prices of goods and services in an economy over a period of time. While inflation is often viewed as a negative economic phenomenon, it can actually have several benefits for an economy (managed properly).

1) Inflation encourages investment and spending. When prices are rising, people are incentivized to spend their money now rather than later, as they expect prices to increase in the future. This can lead to increased demand for goods and services, which in turn can drive economic growth. Additionally, inflation can encourage investment, as investors seek to protect their wealth from the effects of inflation by investing in assets that are likely to appreciate in value.

2) Inflation boosts economic growth. When prices are rising, businesses can increase their prices and profits, which can provide them with the resources they need to invest in growth and expansion. This pricing power is being witnessed today in earnings beats of Q1. Additionally, inflation can lead to increased employment, as businesses may need to hire more workers to meet the increased demand for their products and services.

3) Inflation can reduce our debt burden. When prices are rising, the value of money decreases over time. This means that debts that were incurred in the past become less burdensome over time, as the real value of the debt decreases. This can provide relief to individuals and businesses that are struggling with high levels of debt.

4) Inflation encourages wage growth as workers demand higher wages to keep up with the rising cost of living. This can help to reduce income inequality and provide workers with the purchasing power they need to maintain a decent standard of living. The fall survey by research firm WTW had average estimated salary increases rising to 4.6%in 2023 from actual pay rises of 4.2% last year. A Conference Board poll highlighted a similar trend, with budgets for salary increases rising to 4.3% from 4.1% last year.
We know the negative effects of inflation; reduced purchasing power, decreased consumer confidence, and increased uncertainty. We’re seeing that uncertainty now, along with the Fed’s 10 straight rate hikes. But there are potential upsides as well. I think that’s what we’re seeing today in the form of Q1 earnings beats and a still resilient economy/markets (both here and abroad). It’s a story we’ll stay on top of. We always enjoy researching the contrarian view.

VRA Bottom Line on the Fed

10 year yields continue to decline, with a 54% spread between the 10 year and Fed funds rate. The markets, through inverted yield curves, are screaming at the Fed to cut rates. Our forecast is unchanged; we expect “massive” rate cuts by year end with a 10 year yield that falls below 3% by the end of 2023.

The Markets Love When the Fed Stops Hiking

History shows that solid gains take place when the Fed stops hiking rates. The last five times the Fed stopped hiking rates the S&P 500 averaged an 8% gain after 3 months and 21% return after 12 months (FactSet)

Regional Bank Implosion — Make It Stop 

In our view this problem will get solved. To make that happen ASAP, depositors must have the same protection at regional banks that they have at major money center banks (which are too big to fail). 

As we’ve covered over the last couple of months, as scary-looking as this destruction in regional bank stocks has been, the story here is much different from the financial crisis. This is not 2008. 

We’re not witnessing credit related issues…certainly not so far…but instead we’re seeing downside losses from policy and mismanagement of interest rate risks. The Fed’s ultra-aggressive rate hikes the culprit. After today, the Fed will have hiked 10 straight times since March of 2022. 

Here’s the key issue today; depositors with more than $250k at regional banks are fleeing with their money into the safety of major money center banks. JP Morgan and pals are salivating (always follow the money). We’re watching bank runs take place here, all because policy makers and regulators refuse to step in and do their jobs. We’re not talking about potential “moral hazards” of backstopping failed banks. We’re talking about co’s that keep excess liquidity at regionals for payrolls, venture capital funding dollars, etc, that simply cannot take the risk that their bank could go under and take their payroll funds and much-needed liquidity with them. 

During the GFC there was a program called TLGP (temporary liquidity guarantee program) that solved this problem. Until and unless the Biden admin and bank regulators (Feds) get in front of this issue, the risks of investing in regional banks will likely continue. Again, policy issues along with mismanagement of interest rate risks. Not credit related risks. 

VRA Bottom Line: we think this problem gets solved. As much as I’ve disliked bank stocks, for as long as I can remember, there’s a signifiant trading opportunity nearing, certainly in regional bank stocks. KRE is the symbol for the regional bank ETF. We’d rather not try and catch a falling knife but once the bottom is in we’ll look to add KRE to the VRA Portfolio (as a trade). 

Bidding Wars Are Back in the Housing Market

Bidding wars are back, with 41% of homes in March getting multiple offers. This is happening as homebuilders are hitting new 52 week highs. Housing is the most important leading economic indicator in the VRA Investing System…and one amazing discounting mechanism and forward looking indicator of things to come. We are likely just in inning 3 of a long term bullish megatrend in housing, as we spelled out in our new book “The Big Bribe” (Amazon). =

Until next time, thanks again for reading.

Kip

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