Flowers, Banks and The Fed

By Jeff Kelly on May 5, 2023

“Better to remain silent and be thought a fool than to speak out and remove all doubt”

– Abraham Lincoln

We had both of our daughters home for a night this week. It was nirvana for me. I love them so much and I miss them terribly. We had a great dinner together, gorgeous weather, great food, and the privilege of their company. We got to take a walk on the trail with flowers in full bloom.

Sadly, the next day was the Federal Reserve meeting. Our younger daughter is here for the week. We went to a very zen coffee shop the morning after the Fed. Unfortunately, I was ranting a bit about the Fed and upset the zen of the establishment. Sandra and Nicole have gone back a couple times, but I am not allowed.

Federal Reserve chair Jay Powell Wednesday said that the U.S. banking system is “sound and resilient.” Shortly after the close of his press conference shares of many regional banks began to trade significantly lower.  He and his ship of fools had just raised rates 25 basis points at their May meeting. They have been and continue to raise rates into a weakening economy. They have been and continue to raise rates into inflation measures falling precipitously. They have been and continue to raise rates into a banking crisis.

The effects of rate increases take 12-18 months to be fully realized. This means we are just starting to see the effects of rate increases from early last year. The Fed Chairman also said the words you never want to hear from a policy maker “it’s different this time”.

I think you are right Mr. Chairman but not in the way you’d like to see. We have never had a Fed Chairman raise rates into a banking crisis. We have never had the equity market risk concentrated in seven Technology stocks. Below is a chart of the regional banking ETF, KRE. Maybe this looks sound to you but it’s a little troubling to me.

It’s down 47% since January. It’s down about 7% since Mr. Powell spoke on Wednesday.

Call me crazy but I don’t think it’s great for the country for smaller banks to fail. Adding to this witch’s brew is the coming debt ceiling. Perhaps Mr. Powell is right. Maybe lower earnings, higher interest rates and seven tech stocks supporting the market is going to end well. Maybe raising rates into the weakening economy will lead to a “soft landing”. Maybe I’m just old. And maybe pigs will fly. But I don’t think so.

CHARTS FROM THE WEEK PAST

ISM Manufacturing “improved” +0.8 pts to a still contractionary 47.1 in April.  

“JOLTS… lighter than expected openings… near 9.6m was flagged by timelier data from Indeed (updated weekly) and it also suggests openings should move down a bit more towards about 9.5m in April… the component with the most information here is the quit rate as it leads wage growth (ECI) by about 6 months… it fell to 2.5 from 2.6 overall and to 2.7 from 2.8 (revised down from 2.9) for private… suggests ECI wages should throttled down to sub 4% y/y from 5% by 3Q.”

Private capital is raising more than public markets.

This doesn’t end well.

Tech is not leading.

More relative lows for tech.

Oil 44% off highs, below 70 again.

Inflation? Not any here.

Yields declining all over the globe.

Bonds rallying.

Aggregate change in visits to retailers week over week is dismal.

This will lead to lower sales.

Huge improvement here: prime-age labor force participation rate rose to 83.3% in April, which is highest since March 2008.

April household employment much softer than nonfarm payrolls with +139k gain, down from +577k in prior month.

Number of new home listings -21%year over year, -31% compared to 2019.

Small Cap Stocks (Russell 2000) performing poor vs. the S&P 500.

The Fed holds hands and sings kumbaya as they led the U.S. into a banking crisis and recession.

No dissent on idiotic policy.

Speaks for itself.

Rail traffic continues to be poor.

The number to focus on is intermodal.

The S&P 500 earnings.

417 of 500 companies have reported. Earnings down 2.22% sales up 3.74%.

Nasdaq 100 earnings for the quarter are down 7.94%.

Tech in the Nasdaq 100 earnings are down 9.67%. Hmm…..

Nonfarm payroll growth beat expectations at 253K, but downward revisions pull 3 month average falls to 222K.

The chart below shows the Fed being too tight.

Fed funds are above the two-year treasury yield.

The yield curve is beginning to steepen.

This leads to less of a curve inversion. A precursor to RECESSION.

Very few loans being done in Europe.

Looking for budget cuts/ look here.

WEEKEND HOMEWORK

A good podcast with lots of information about the banking crisis. Erik Townsend and Patrick Ceresna welcome Chris Whalen to MacroVoices. Erik and Chris discuss:

• Latest FOMC
• Is ’08 size banking crisis on the horizon?
• Lessons from the 80’s on what’s ahead
• Funding opportunity dip
• Is the latest hike really the last one?
• Outlook on Fed policy and inflation
• Portfolio construction
• Banking crisis risks & inflation runaway risks

MacroVoices #374 Chris Whalen: Are More Banks Going To Fail?

The Tim Ferriss Show | Josh Waitzkin — How to Cram 2 Months of Learning into 1 Day 

Josh Waitzkin, author of The Art of Learning, is an eight-time US National Chess Champion, a two-time World Champion in Tai Chi Chuan Push Hands, and the first Brazilian Jiu Jitsu Black Belt under nine-time World Champion Marcelo Garcia.

For the past 12 years, Josh has been channeling his passion for the outer limits of the learning process toward training elite mental performers in business and finance, and to revolutionizing the education system through his nonprofit foundation, The Art of Learning Project. Josh is currently in the process of taking on his fourth and fifth disciplines, paddle surfing and foiling, and is an all-in father and husband.

The audio and video were recorded at The Sohn Investment Conference in the David Geffen Hall at Lincoln Center for the Performing Arts.

Speaking to his lawyers days after the Oklahoma City bombing, the Gulf War veteran expressed no regrets: killing 168 people was his patriotic duty. He cited the Declaration of Independence from memory: “Whenever any Form of Government becomes destructive of these ends, it is the Right of the People to alter or to abolish it.” He had obsessively followed the siege of Waco and seethed at the imposition of President Bill Clinton’s assault weapons ban. A self-proclaimed white separatist, he abhorred immigration and wanted women to return to traditional roles. As he watched the industrial decline of his native Buffalo, McVeigh longed for when America was great.

New York Times bestselling author Jeffrey Toobin traces the dramatic history and profound legacy of Timothy McVeigh, who once declared, “I believe there is an army out there, ready to rise up, even though I never found it.” But that doesn’t mean his army wasn’t there. With news-breaking reportage, Toobin details how McVeigh’s principles and tactics have flourished in the decades since his death in 2001, reaching an apotheosis on January 6 when hundreds of rioters stormed the Capitol. Based on nearly a million previously unreleased tapes, photographs, and documents, including detailed communications between McVeigh and his lawyers, as well as interviews with such key figures as Bill Clinton, Homegrown reveals how the story of Timothy McVeigh and the Oklahoma City bombing is not only a powerful retelling of one of the great outrages of our time, but a warning for our future.

Have a terrific weekend.