Fed Chairman Powell to Markets: I Hear You

The stock market did not fall because of anything the Fed Reserve did or said. It fell because the President was trying to wreck the country.

What a surprise, committed to propping up the bubble.

Some stock analysts define a residual as the market price (MP) of a share of stock minus its intrinsic value (IV). Then, if this residual is negative, I should buy the stock because it is undervalued. In contrast, when this residual is positive, I should not buy it. The difficulty is trying to determine a stock's IV; since its MP is readily available. One metric that is key to determining its IV is its P/E ratio. Earnings drive stock prices. If stocks overall have a historical P/E ratio of about 16, then overall P/E's significantly above 16 may indicate overvaluations. And, such P/E's in excess of 30 may indicate "irrationally exuberant" over valuations. A P/E of 16, has a reciprocal, or an E/P of 1/16, indicating an annual after-tax ROI of about 6.25%. To maintain market wide P/Es of 20 or more for a lengthy period usually becomes unsustainable, leading to burst bubbles. During 2018, the recent corporate tax cuts helped to lower P/E ratios considerably by raising earnings, via lower income tax expenses. Also, in 2018, the levels of stock buybacks were unprecedented and totaled over $1 trillion. They were used to levitate earnings by many firms with limited organic growth opportunities. To maintain this financial environment of very robust stock prices may force investments advisors to repeatedly act as Pollyannas. By raising interest rates, how much does the Fed lower corporate earnings and stock prices, via higher interest expenses? 1/7 M 1:41p Greenville NC

So now we have the “ Powell put, too replace the Yellen put, replacing the Bernanke put, which replaced the granddaddy of all puts, The Greenspan Put: when will we return to being a real economy producing real products that people want to buy, not an economy dependent on financialization and hype: real estate bubble/ bust, stock/ bubble /bust, dot com/ bubble/bust or social media investing mania bubble /bust, disruptive business model investing bubble/ bust: all just a way of keeping middle class rubes at the table in the casino while being fleeced by the one percent pros.

In a recent Bloomberg Interview Jeremy Grantham observed that in every run-up to a presidential election since 1932! the fed has stimulated the economy at this time going forward to insure that the employment stats 6 months prior to the election look good. The numbers have to look good at that specific point . Not a year before (short memory spans) but 6 months. Due to lag factors that requires the fed to ease up as they are doing now right on schedule.

So many easy jabs available here... Good thing we had a tall Fed head learning on the job instead of the too-short, experienced, wise woman Obama gave us. I'd have been happier with a careful speech 2 weeks ago but I'll take it.

It is not the job of the Fed to prop up stock prices. Paul Volcker will tell you that. It is also not their job to print money; indeed it is the exact opposite. Ben Bernanke will not tell you that, he will tell you that Quantitative Easing saved the day. I am dismayed to see Jerome Powell succumb to political pressure from a fiscally irresponsible Administration. Federal debt is now $22 trillion. Address that debt, Mr Powell, and you will have done your job.

The recent recovery of wage growth is needed to repair a decade's worth of negative real wage growth. As for inflation: what inflation? The only inflation is in overpriced healthcare, higher education and monopolistic industries like telecom and cable TV. Everywhere else: inflation has turned to disinflation. Correcting these wide deviations between sectors is not the job of the Fed. It is the job of Congress and regulatory policy that deals with the inherent problems in those sectors that causes inflation in those sectors.

It is Powell's job to create a healthy economy, with low inflation, growth, and good employment. However, if we had such an economy, the stock market would be much lower. If capital were actually used for investing in business, instead of financial engineering in the securities markets, interest rates would be 4-5%. Such interest rates are totally compatible with an economy that is humming along. However, such interest rates would kill stock prices. Stock values would revert to the historical norms, and would trade at reasonable multiples. Growth premiums would be cut in half. If, on the other hand, Powell wants to prop up stock prices, then he needs to promote low interest rates, low growth, and high unemployment.

Not much new. The market read too much into the chairman's remarks of two weeks ago and his clarification seems to help the market see what he was really saying yesterday. The FED is doing its job and fulfilling its mandate and only a part of market volatility. The real market volatility is being created elsewhere and I doubt I have to tell the reader who is responsible

It sounds to me like he's going to do what Trump wanted him to do a few weeks back ... stop the rate increases. It sounded good when he said he wouldn't resign if Trump wanted him to, but I'll wait to see how he acts.

This doesn’t exactly reassure me that markets are rational, at least not in the usual sense of the word.

Rates variability does depend on changes of the money capital market. And the latter on whether there is a good climate for productive investment or the possibility of obtaining a decent profit margin. The Chinese market is saturated because overproduction relative to consumption as reported in your front page news. Apple iPhones don’t sell as well as Chinese brands because their price is not competitive relative to average quality as further reported in that piece. Apple stopped or decreased orders from Foxconn back in the fall. American companies are not getting the returns they used to from the fastest growing productive area and concomitant consumer market. So Powell is prudent to say that but it is not in his hands to set rates at whim. He rather confirms a trend that is independent of his will and personal wishes. Investments in production go along with productive consumption (raw materials, equipment, technologies, and labor power) which as you see may have bigger impact on recessions or corrections than individual consumption. The Fed is powerless about it. See the long period of stagnation after 2008 despite zero interest.

Chairman Powell has made a very helpful clarification of his and the Fed‘s thinking on an issue which many economists myself included have explored over the decade since 2008. 2008 was a crash and slow down of twice a century character. The fallout was widespread and the entire global banking and financial system was on the edge of collapse. Given this fact ,it is not surprising that old dogmas like the quantity theory of money and the Friedman inspired Wicksellian theory that there is an interest rate below which you cannot go without triggering automatic inflation need to be carefully reconsidered. Old orthodoxies like for example the notion that central bank purchase of debt even in circumstances of deep recession will automatically be inflationary also need rethinking as the last decade clearly demonstrates. Finally the rapidly evolving nature of globalization , its impact upon the structure and role of global corporations and the technological revolution underway need to be factored in. Are the quality of goods produced per dollar exact substitutes for previous goods or are they superior and hence potentially cheaper thereby adding disinflationary influence to the economy. There is much to be debated and the chairman has made a very useful first contribution.

The market, the nation and the world need a stable person to speak words that offer confidence and reassurance. That's never going to come from the stable genius himself, in fact he's doing everything in his power to destabilize it. Because that what Putin wants.

So another Fed put gets written and the economics of redistribution from poor to rich continues.