Sorry, Latin joke. What I meant to say was that the Federal Reserve has dual mandates. They are price stability and maximum sustainable employment. The FOMC defines price stability as inflation at 2% as measured by the Personal Consumption Expenditures (PCE) index.
As for employment, the FOMC says that the number for maximum sustainable employment over time can change depending on various indicators. Most recently they decided that the magic number was 4.1%.
Today, the most recent number came in below expectations. The PCE, rose 2.6% in May on a year-over-year basis. That is the lowest increase since March 2021.
Excluding volatile food and energy prices, core inflation rose 0.1% from April to May, the smallest increase since the spring of 2020.
Prices for physical goods fell 0.4% from April to May. Gasoline prices dropped 3.4%, furniture prices 1% and the prices of recreational goods and vehicles 1.6%.
On the other hand, prices for services, which include items like restaurant meals and airline fares, ticked up 0.2%.
The latest unemployment rate was 4% in May however listings for jobs have dropped.
When All You Have is a Hammer
So, inflation is at 2.6% and unemployment is at 4%. One is slightly above and the other is below the Fed’s target to cut rates. The Fed has said it will cut rates one time this year. But looking at the numbers it could cut more.
The problem with using interest rates to regulate the economy is that it takes 18 months for the effects to hit the economy. And economists, especially at the Fed, are always too late.
Here are some quotes from famous and credentialed economists getting it wrong:
- “We will not have any more crashes in our time.” — John Maynard Keynes, 1927 (Considered the top economist in history).
- “Stock prices have reached what looks like a permanently high plateau.” — Irving Fisher, 1929 (“Pioneer” of Monetary Theory).
- “The Soviet economy is proof that a socialist command economy can function and even thrive.” — Paul Samuelson, 1948 (Nobel Prize)
- “By 2005 or so, it will become clear that the Internet’s impact on the economy has been no greater than the fax machine’s” — Paul Krugman, 1998 (Nobel Prize)
- “The subprime crisis is contained.” — Ben Bernanke, 2007 (Nobel Prize)
- “Inflation is transitory” — Janet Yellen, 2021 (Fed Reserve Chair, Treasury Secr)
Here is a chart of high-paying jobs that aren’t needed anymore:
The Fed should be aggressively cutting interest rates now. Think of it like docking a boat. You start turning and cut power well before you get to the dock. You want to ease into a slip not crash into the pylons. However, the Fed doesn’t think like that. They don’t understand momentum and use indicators that are old before they are printed.
The way to play it is to start selling into the surge on news of interest rate cuts.
Bickering Fools
In other news, there was a presidential debate last night. Back in March after visiting Mar-a-lago, I wrote:
“If you believe that there needs to be serious competition to the traditional media outlets and that half of Americans aren’t being served you have to believe that Trump Media (DJT) will be a legitimate player. They are attempting to build out a streaming service and there was some talk about cloud infrastructure.
The stock has rolled over and looks to be heading down to around $35. I think the way to play it is to buy some wacky out-of-the-money calls around a catalyst – say the week after the Democratic convention when they force Biden out…”
At the time no one was talking about Biden leaving the ticket. Today, everyone is. The stock is selling the news and is heading down towards $28.
The convention is August 19-22. One could wait for the dip and pick up some September 20 calls.
All the best,
Christian DeHaemer
Outsider Club
DJT Calls: https://finance.yahoo.com/quote/DJT/options/?date=1723766400
https://www.outsiderclub.com/greetings-from-mar-a-logo/
