Marc Cuniberti Last week the markets got rocked hard down again when a strong employment/jobs number hit the news wires.
More people were hired than expected and unemployment dropped.
So why did the market drop?
The thinking is now the Federal Reserve (the FEDS) will continue to embark on their crusade of interest rate increases which is usually bad news for the markets.
The FED’s economic model suggests the increased hiring and drop in 0. unemployment signal a healthier economy which means more inflation. An increase in job hiring can put upward pressure on wages which adds to inflation. This is known as wage push inflation.
The FEDS probably have it wrong again. Unfortunately for all of us, the track record of the FED is not good.
Just look at the chart of their interest rate manipulations, their main tool for steering the economy.
It’s all over the map with radical up and down movements. Interest rate manipulations are supposed to be used sparingly and gently. Not forcibly jerked all around in quick movements. Moving quickly in this arena historically is not a good thing. This FED tool of manipulating rates is used to prevent crashes and inflation.
Need I say more as to the FED’s effectiveness?
Why the FED is so often wrong is that the economic data they look at to steer the economy is backward looking. Economic data is reporting things that have already happened. Like driving by looking in the rearview mirror. It will give you a great analysis of where you’ve been but not where you should go.
The FED also has a history of reacting too quickly.
Interest rate moves take time to work. Many analysts estimate 12-18 months. Although data is published almost daily in some form or another, there are many analysts that argue the FED should wait longer before applying more rate changes. The latest round of interest rate increases is the fastest on record. Why are they so impatient?
Fast forward to the market rout last week caused by the positive employment data.
You would think the improvement in hiring would be good news for the stock markets. Nowadays it seems the market hates good economic news as it can mean the FED will act by raising rates. It is because the FED thinks good employment data means an expanding economy and that’s bad for inflation. And usually, they would be right.
But not this time.
What the FED has missed is the basic reason why employment has improved, and thinking it’s because the economy is getting better.
In my opinion, it is the exact opposite. The economy is getting worse. Doing more rate increases will likely increase the odds of crashing the economy. The Fed may be failing to that see this time is different.
People HAD been spending COVID saving from lavish handouts from the government which is why people could sit at home longer than usual.
Now the money is running out. We know that because the record savings we saw during the shutdown are dropping quickly. Additionally, defaults and credit card use are on the rise.
Simply put, the increase in inflation has accelerated the evaporation of CoVid savings. Now people are flocking back to work because they are running out of money and inflation is accelerating that decline.
Finally, as more people are desperate for work, employers will have more pricing power to reduce wages or at least not increase them.
Thus the wage inflation the FEDS fear will not materialize.
Concluding, the employment numbers are getting better not because the economy is. It’s the exact opposite. The economy is faltering and people are having to go back to work because of it.
That the FEDs move to raise rates even higher as the economy continues to contract will be exactly the wrong thing to do.
As often is the case, the FEDS are once again on course to break something like they so often do by failing to see what is really happening in the economy.
And what they break will likely be you and I and most all people like us.
Hold on to your hats.
Expect another rate increase.
You ain’t seen nothing yet.
“Watching the markets so you don’t have to”
(As mentioned please use the below disclaimer exactly) THANKS (Regulations)
This article expresses the opinion of Marc Cuniberti and is not meant as investment advice, or a recommendation to buy or sell any securities, nor represents the opinion of any bank, investment firm or RIA, nor this media outlet, its staff, members or underwriters. Mr. Cuniberti holds a B.A. in Economics with honors, 1979, and California Insurance License #0L34249. His insurance agency is BAP INC. that can be contacted at (530)559-1214. Marc was voted best financial advisor in the county 2021. Email: [email protected]
