The Fed Fix Is In, The Deep Financial State Unmasked
Hi. Peter Navarro here with this week’s market and economy rap for the week ending December 15, 2023. Here, the old Wild West expression “Katie, bar the door” comes to mind as the S&P 500 once again finished up for the week – with a little give back on Thursday and Friday.
Technicians look at the breach of 4,600 on the S&P 500 as blowing through a key resistance level and thus paving the way for a sustained run up. Yet, in the short term, the stock market is technically in an overbought condition, signaling a possible pull back.
There is also this: Virtually all the bears on Wall Street have turned tail and closed their short positions. So where might the money come from for that next bullish leg up?
And there is this big Christmas “what if.” What if portfolio managers start closing positions to book their profits for the year? That’s a Christmas surprise that could turn very ugly. No wonder they say Wall Street climbs a wall of worry.
The perennial question we have pondered during this unexpected bull run is this: Just what the heck is going on?
The short answer – and that is a very misplaced pun given the circumstances – is what I learned about getting my PhD at Harvard in the 1980s about something called the “political business cycle.” To wit, economic growth in an election year tends to be systematically higher as the incumbent guns both the fiscal and monetary policy levers.
What we are witnessing today is the political business cycle on steroids. Not only is the White House and Congress in on the fiscal policy fix – the Keynesian stimulus now coursing into the veins of our economy is unprecedented. The Federal Reserve is also in on the monetary policy fix.
That the Fed fix is in was on full display in this last week’s meeting of the Federal Reserve and Fed Chair Jay Powell’s comments afterwards. It was a foregone conclusion the Fed would not increase rates further. But the Fed, quite imprudently, went much further in announcing a more aggressive rate cut schedule.
The big take away from Fed Chair Jay Powell’s remarks following the Fed meeting is that Powell has officially joined both the Biden reelection campaign AND the financial wing of the Deep Administrative State.
Let’s remember here that even though President Trump originally appointed Jay Powell – at the urging of then Treasury Secretary Steve Mnuchin – Mnuchin’s boy turned out to be the worst appointment of Trump’s career, at least according to President Trump.
So Powell knows he’s history if Trump wins the White House back in 2024. Ergo, the Federal Reserve has now become a willing accomplice of the destruction of the American economy, and a key driver of the multiple policy cars we now see driving us off of a fiscal cliff.
Here’s the underlying two numbers that put an exclamation point on that truth.
· Biden’s fiscal profligacy has goosed year-on-year spending by an astonishing 17%
· Nominal GDP growth in Q3 including inflation hit an annualized 8.9%.
To put this second number in perspective, steady state solid growth under Trump policies would oscillate around a real, inflation-adjusted GDP of about a quite healthy 3%. With inflation at or less than the Fed target of 2%, that means an equally healthy nominal growth rate of around 5%.
So Biden’s number at 8.9% approaches almost DOUBLE of what we should be witnessing in the healthiest of economies. That’s what we call an “unsustainable equilibrium” in economics – a wildly unsustainable equilibrium that is purely a product of fiscal and monetary policy profligacy.
So yes, we now see the Fed coming in to support Biden’s fiscal profligacy with what is likely to be another wave of, if not easy money, then easing money.
And no shock here: the financial press itself is in on the Fed fix. Not a single reporter asked Powell if he was worried that he might be easing too soon.
Here, if inflation were to reaccelerate, which it is already showing signs of doing, it would be a déjà vu of the 1970s where it looked like the problem was solved, the Fed eased, and BOOM, off we went for a lost decade of stagflation.
My final take: No matter what Powell and Yellin and all of these Machiavellian clowns in the financial wing of the Deep Administrative State do, it’s not going to save Joe Biden politically.
No amount of stimulus will save Biden from American blue collar workers angry at the surge of uneducated illegal aliens into their labor market; from families across flyover country who can’t afford food, housing, or energy; from Bernie Bro millennials who will never be able to afford a car, house, or raising kids and are rapidly turning conservative; or from soccer moms and suburban commuter dads sick to their stomach over the crap their children are forced to endure from the woke curricula of K-12 school boards.
Voters know in their bones that something is terribly wrong with the American economy and it all tracks back to Joe Biden and the Democrats.
The Fed Fix Is In, The Deep Financial State Unmasked