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Monday, August 29, 2022
After some thought over the weekend after The Dow fell more than 1,000 points on FridayI put up with something.
The Federal Reserve has historically pissed me off.
When I started in finance as a Wall Street analyst, I remember watching then-Federal Reserve Chairman Alan Greenspan dodge simple questions. Then I watched Greenspan fade into the sunset after a housing crash he caused by keeping interest rates too low for too long. Greenspan has not received justice for his role in the Great Recession.
All of this made me angry.
Next up was Ben Bernanke. I understood Bernanke’s calm demeanor, but there were times when he seemed out of touch with the realities playing out in the markets during a housing crisis caused by Wall Street greed. Bernanke sometimes upset me, but not as much as Greenspan.
Then we had Janet Yellen, who many believe raised interest rates too early in 2015. This was not well received at the time and I remember being fired up at the time. Yellen is currently Treasury Secretary, despite admitting earlier this year that she was wrong about the severity of the COVID-induced inflationary epidemic.
More rewards for bad decisions by Fed policymakers. Does it ever end?
This brings us to current Fed Chairman Jerome Powell, whose last mistake was misjudging inflation. Powell is now being forced to play catch-up — and is damaging investor psyche and damaging market confidence in the process.
Here are five problems for the markets in my opinion Powell’s Jackson Hole speech caused by:
Fundamentally bad companies such as Bed Bath & Beyond will face a much higher cost of capital at a time when they need a lower cost of capital. Bankruptcy risk looms for stranded companies as they wrestle with Big Powell’s iron fist.
Some of Wall Street’s most crowded trades — namely names with big tech momentum like Apple and Amazon, which are enjoying a backdrop of low interest rates — could be used as a source of funds in the coming months as investors brace for more volatility on the market. This sale may move to other parts of the market.
Earnings growth is likely to slow further in 2023 as companies deal with a higher cost of capital and weakening top lines.
A lack of confidence in what the Fed is doing can weigh on household wealth-building initiatives, nearly freezing them and hurting their spending plans.
As Powell hinted, expect “pain” as the Fed “stays at it” on raising interest rates. The pain in this case could mean job loss and lower wages at a time of still high inflation.
Put these things together and you have a reasonable prospect of wealth destruction caused in part by a dead-end Fed that is not yet accountable.
To be clear, do not take this letter as a call that the Federal Reserve should be abolished. What I am saying is that the Federal Reserve needs to be more accountable. When they make big policy mistakes, there must be consequences – because there are consequences that affect the wealth of American households.
If Jerome Powell had gotten a good handle on inflation last year, the Dow probably wouldn’t have dropped 1,000-plus points on Friday. Investors probably won’t dump stocks and cash in, as some recent surveys suggest. And above all else, there will be a more favorable environment for building wealth.
Happy Wealth Building Monday!
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