Let the Palace Intrigue Begin
Jerome Powell says Trump can't fire him... 'Not permitted under the law'… The Fed cuts rates again… The labor market and inflation balance… The 1970s all over again?... The market is appeased for now…
Back to business...
The day after the "day after the election," the Federal Reserve was back in the national financial spotlight. The U.S. central bankers finished their latest two-day policy meeting and Fed Chair Jerome Powell held a press conference to try to explain things...
The skinny: a small rate cut (25 basis points) was announced... Powell suggested another could come at the next Fed meeting in December... and maybe most notably, reporters fired a variety of Donald Trump-related questions at Powell, who predictably tried not to offer much detail.
Except on one subject. Asked about reports that, "some of the president elect's advisers have suggested that you should resign" and "if he asked you to leave, would you go?" Powell answered directly.
"No," he said.
After Tuesday night's election, the palace intrigue with the Powell and Trump relationship (and that of monetary policy of the Fed and fiscal policy guided by the White House and Congress) is just starting again.
Last time around as president, Trump was critical of the Fed head − to put it mildly. Trump fired off roughly 100-plus Fed and Powell-related tweets, and stumped for lower interest rates, from 2016 to 2020. There's a case to be made that the nagging had an influence...
During this 2024 campaign, Trump suggested he should have more direct influence on Fed decisions. And in February, he said he wouldn't reappoint Powell to lead the Fed. A few months later, Trump softened that stance but not completely.
In July, Trump said he'd be fine if Powell finished out his term as Fed chair, which ends in May 2026, "especially if I thought he was doing the right thing." That's not exactly a ringing endorsement, or a reason to expect smooth sailing ahead in Fed matters.
Just two days after Trump was elected to a second term, new questions have already emerged...
Following the first question about what he would do if he were asked to resign, Powell was asked if he thought a president – legally – could fire him or any Fed governor.
"Not permitted under the law," replied Powell, a trained lawyer.
We will await the reply (on social media, perhaps) and the conversation that will undoubtedly continue... More substantively, Powell did provide one other answer about how the Fed will weigh any new policies coming from the White House or Congress next year...
In the near term, the election will have no effects on our policy decisions... Many, many things affect the economy... We don't know what the timing and substance of any policy changes will be. We therefore don't know what the effects on the economy will be.
We don't guess, we don't speculate, and we don't assume.
OK. But we're still 74 days before Trump is scheduled to be inaugurated as president for a second time... and before any direct criticisms of Powell land in a meaningful way... and Trump passes judgment as president on what's "right" and "wrong."
For now, the Fed 'juice' continues...
The central bank has lowered rates again, making the cost of borrowing a bit easier once more – as it has telegraphed that it would. And to me (Corey McLaughlin), this happened almost entirely because the Fed string-pullers feel they have a promise to bankers to fulfill.
Because if you look at the Fed's supposedly dear "data," the unemployment rate has fallen in the past few months... there are signs that the pace of inflation is picking up again... and GDP (as flawed of a measure as it is) is growing at roughly a 3% clip.
Something doesn't add up.
Perhaps the central bankers are expecting more weakness in the labor market. They may be right about that.
The latest weekly jobless claims published today (for the week ending October 26) said that 1.89 million people filed claims for "continuing" unemployment benefits.
That's the highest level since November 2021. And the four-week moving average of continuing claims is nearly 1.88 million, which is also the highest in three years.
If you look at these numbers, you could say by giving a boost to the economy, the Fed could be trying to "stay ahead of the curve" for once. That's what Powell said in September after the Fed made its "first cut."
Today, he said the labor market "remains solid" and the Fed wants it to stay that way. However, according to Powell, it's already "less tight than just before the pandemic." Thus, the central bank will probably continue to lower rates to "move to a more neutral" policy stance "over time."
However, the remainder in this equation is the possibility of high(er) inflation – again...
Over the past few months – since the day the Fed cut rates by 50 basis points on September 18 – the bond market has been suggesting investors are expecting higher inflation again. Longer-term yields have risen substantially.
The 10-year Treasury rate – reflective of inflation and/or growth expectations – is around 4.4% today, up from 3.7% on September 18. The 30-year is above 4.5%, up from 4% over this same span.
About this situation today, Powell said he believes higher yields are "not principally about higher inflation expectations" but "a sense of more likely stronger growth and perhaps less in the way of downside risks," but also...
We're watching that... We'll see where they settle. It's too early to really say where they settle… We do take financial conditions into account if they are persistent and material, then we'll certainly take them into account with our policy.
But we're not at that stage right now... These things don't really have mainly to do with Fed policy, but to do with other factors in the economy.
We will see...
Remember the 1970s...
In addition to whatever the Fed does, to-be-determined fiscal policy could play a role in fueling a reacceleration of inflation, much like what occurred amid and after the government response to the pandemic in 2020 and 2021... first under Trump, then under Joe Biden.
If Powell's wrong, at worst the path of inflation could keep following that 1970s path. We wrote and shared the below chart in September, two days before the Fed's first rate cut, and it's worth resharing today...
We've spilled a lot of ink over the past few months about the weakening labor market and the increasing number of troubling economic indicators. Now, the Fed is about to do what it's "supposed" to do: juice the economy to slow any further weakening.
Of course, that comes with a trade-off, like potentially higher inflation again. This idea has the attention of a few of our editors, who think we could be headed toward a repeat of a full decade of 1970's-style high inflation.
In other words, the inflation we saw in 2021 and 2022 could just be the start of our inflation nightmare. Check out this chart from Bitcoin News on social media platform X that Crypto Capital editor Eric Wade shared with several of his fellow editors today...
The orange line shows the nominal rates of inflation (as measured by the consumer price index) from 1966 to 1983. The blue line shows inflation from 2015 through today.
As you can see, while the nominal rates of inflation were higher from 1966 to 1983 compared with 2015 through today, the percentage changes in the path of inflation are nearly identical.
In the first half of the 1970s, Fed Chair Arthur Burns thought the economy had moved past an initial inflation bump (around 6%, according to the consumer price index, in 1970) and spike (to 11% in 1974) tied to oil price shocks.
Under Burns, the Fed lowered the federal-funds rate by 7 percentage points into 1975 after the Arab oil embargo ended. In the period after that, the pace of price growth returned with a vengeance, with the consumer price index bouncing back from around 6% in 1976 to a high of 13.5% in 1980.
Burns ran the Fed for two terms from 1970 to 1978. Then G. William Miller had the job for about two years before becoming Treasury secretary. He was followed by Paul Volcker, who took over in August 1979... Volcker jacked up rates to 20% to really kill inflation (and cause a bad recession with unemployment that topped 10% by 1982).
I don't have a crystal ball, but I see a possibility in the future of history rhyming (though it doesn't always happen, as we just noted yesterday). However, there's one critical difference now: The U.S. debt-to-GDP ratio is 120% today... compared with just 30% in the 1970s.
Uncle Sam can't afford higher interest rates without serious consequences and costs greater than the dollar-value of what the U.S. is producing... and "We the People" can't afford and clearly don't want higher(er) inflation. A presidential election just told us that.
Something has to give. And I hesitate to bet on the government spending less anytime soon.
For today, though...
Investors in stocks (and bitcoin) were generally appeased... a day after what was the best post-election performance for the benchmark S&P 500 Index in history.
Today, the tech-heavy Nasdaq Composite Index was 1.5% higher, the S&P 500 was up nearly 1%, and the Dow Jones Industrial Average edged higher by a fraction to a new all-time high.
The Russell 2000 Index took a breather, finishing down slightly. Yet, as our colleague Chris Igou told his DailyWealth Trader subscribers today, after a pop of the kind the small-cap index saw yesterday (almost 6%), history suggests more gains ahead.
But bitcoin has been the biggest post-election winner of any asset class – up another 1% today to make a 14% return in the past 72 hours – and is trading at an all-time high above $76,000. Trump is seen as a much bigger cryptocurrency proponent than Kamala Harris.
And while bitcoin and other cryptos are volatile in the short term, the technical and fundamental setup for the world's most popular cryptocurrency is promising over the longer run right now as well...
Bitcoin has convincingly broken above the "downward channel" it had been trading in for much of this year. And we're entering the part of its every-four-year "post halving" timeline that has seen the largest gains, and tops, over the crypto's previous boom-and-bust cycles.
Gold pushed higher by almost 2% today as well. That's a smart move if you ask me, because inflation isn’t going anywhere. And, apparently, neither is Jerome Powell.
New 52-week highs (as of 11/6/24): Automatic Data Processing (ADP), Amazon (AMZN), Atmus Filtration Technologies (ATMU), American Express (AXP), Alpha Architect 1-3 Month Box Fund (BOXX), Brown & Brown (BRO), Peabody Energy (BTU), Maplebear (CART), Consol Energy (CEIX), Pacer U.S. Cash Cows 100 Fund (COWZ), Cisco Systems (CSCO), Cintas (CTAS), Commvault Systems (CVLT), Donaldson (DCI), Electronic Arts (EA), Expedia (EXPE), Fair Isaac (FICO), Comfort Systems USA (FIX), GEO Group (GEO), Gilead Sciences (GILD), Generac (GNRC), W.W. Grainger (GWW), Houlihan Lokey (HLI), HealthEquity (HQY), iShares Convertible Bond Fund (ICVT), iShares Core S&P Small-Cap Fund (IJR), iShares Russell 2000 Value Fund (IWN), JPMorgan Chase (JPM), Kinder Morgan (KMI), Lumentum (LITE), Cheniere Energy (LNG), Masimo (MASI), Magnolia Oil & Gas (MGY), Mueller Industries (MLI), ONEOK (OKE), Oracle (ORCL), Palo Alto Networks (PANW), Paychex (PAYX), Packaging Corporation of America (PKG), Planet Fitness (PLNT), Ryder System (R), Construction Partners (ROAD), Sprouts Farmers Market (SFM), SPDR S&P 600 Small Cap Value Fund (SLYV), Snap-on (SNA), SPDR Portfolio S&P 500 Value Fund (SPYV), ProShares Ultra S&P 500 (SSO), Summit Materials (SUM), Cambria Shareholder Yield Fund (SYLD), Toast (TOST), Texas Pacific Land (TPL), The Trade Desk (TTD), Twilio (TWLO), Texas Instruments (TXN), ProShares Ultra Financials (UYG), Visa (V), Viper Energy (VNOM), Vanguard S&P 500 Fund (VOO), Vertiv (VRT), Industrial Select Sector SPDR Fund (XLI), Zebra Technologies (ZBRA), Zoom Video Communications (ZM), and the short position in SolarEdge Technologies (SEDG).
In today's mailbag, we're sharing some of your thoughts on the election results. Thanks to all those who wrote in... Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.
"[James] Carville said, 'It's the economy, stupid!' But the real question is, How do we solve the issue of a $36 trillion national debt coupled with the over a $160+ Trillion unfunded 'Infinite Horizon' of obligations for Social Security and Medicare as calculated by the Congressional Research Institute, from the 2021 report of the Medicare Trustee's.
"If the U.S. is on the tab for close to $200 trillion, what will the 'readjustment' look like and how will we survive individually and as a nation?" – Subscriber George F.
Corey McLaughlin comment: This is another way of describing the good reasons why we'll be hedging inflation forever...
"Very simply put: Everything costs much more than it did at the end of 2019 and the majority of Americans are common sense people that know how to see the facts that really matter to them! They can read facts correctly despite the billion-dollar lies presented to them on campaign advertising! That is what the Democrats did not understand and still do not despite their humiliating defeat!" – Subscriber Franco B.
"I think the election was in Trump's favor because we were much better economically under Trump last term... I think Harris pretty much killed her campaign when she was on TV and was asked how her presidency would be different from Biden's. She thought for 30 seconds and said I wouldn't change a thing. Wrong answer – that sealed the deal for me.
"Thanks for asking." – Subscriber C.G.
"I did write in vote for president... I'm not party affiliated. People voted for Trump because of economy and inflation. However, if Trump follows thru with tariffs (even products from allies) that is VERY inflationary. Doesn't make sense to me!!" – Subscriber Jess P.
"Were the results really that shocking? Not to me.
"As much as Trump continued to self-sabotage, and Harris ramped up the denigration of voters who were supporting or leaning his direction instead of focusing on issues and policies, which mattered to all voters, my belief is the real credit for this outcome should go to legacy media. I doubt I wasn't the only voter the media aided in making a decision about how to vote." – Subscriber Kathy D.
All the best,
Corey McLaughlin
Baltimore, Maryland
November 7, 2024