Wednesday Fed Watch – Do Interest Rates Matter?

The Fed must move to head off inflation pressure before it begins.

It's Fed day!

The Federal Reserve is expect to raise rates by 0.25% this afternoon but what matters more is what Chairman Powell has to say at 2:30. In the last statement, the Fed eliminated a line from the March statement that said “the committee is monitoring inflation developments closely.” That seems to indicate they feel inflation is now at their 2% goal and clearly unemployment is below their goal so now the Fed must move to head off inflation pressure before it begins.

In fact, this morning's Producer Price Index is up 0.5%, miles above the 0.2% expected by leading economorons, who obviously do not shop where we shop or eat where we eat. This should bring the markets down from their perch and we can short the S&P (/ES) below the 2,790 line (with tight stops above) and, of course, the Nasdaq (/NQ) at 7,250 and the Russell (/TF) at 1,685 – all Sept contracts now (thanks Jeff!). Yes, we keep trying to short and it keeps failing but – ONE DAY!

There are already many signs of wage inflation. The recent Beige Book indicated all regions were having a lot of hiring pressures and once employers have to start competing for employees by raising wages and benefits – that's a genie that's very hard to put back in the bottle. Wage inflation is bad for Corporate Profits and wages are about 30% of a Corporation's Operating Costs so a 10% increase in wages knocks 3% off earnings unless they raise prices – which adds to inflation and makes more workers demand higher wages….

I remember working in the late 70s and early 80s when it was downright insulting if you didn't get a 5% annual raise just for doing your job 10% was fairly normal for doing a good job and when you took a job that started at $25,000, you fully expected to be making $50,000 in less than 5 years. That seems like a fantasy these days as it's been decades since the workers have been given a fair share of the profits.

At some point, the pendulum will swing back and some portion of those $2Tn in Corporate Profits will find it's way back to 165M workers as they begin to realize that just half of those profits would represent a $6,060 PER WORKER raise they are leaving on the table by not negotiating harder. That's right, $1Tn is a lot of money and US Corporations are sitting on $2Tn in CASH!!! after being given massive tax cuts as they brought it back from overseas.

Ultimately the taxpayers funded that tax break for the Corporations and they promised to use that money to raise salaries and hire more workers but none of that happened and don't think the Democrats aren't going to remind voters of that in November's mid-term elections. The Republican's got elected promising workers they would make things better but the answer to the simple, standard question of "Are you better off now than you were two years ago" is, sadly, "No" for the bottom 80% of our population.

Yes, there are more jobs but they are still crap jobs and, in reality, 200,000 jobs a month is barely keeping up with population growth so jobs are not really being created at any good pace.  The biggest impact is coming from one of the things the GOP would love to roll back and that's rising minimum wage requirements across the country – wages are going from $7.25 to $15 over time in many states – after years of stagnation.

Speaking of crap, we found out yesterday that Elon Musk will be laying off 9% of Tesla's (TSLA) workforce and, if you think it's hard to reconcile Musk's CLAIMS that Tesla will be doubling their rate of production by the end of the month with the FACT that they have decided to lay off 9% of their employees – then you must be too rational to trade the market.  Fortunately, TSLA investors have never been accused of being rational and they are still BUYBUYBUYing the stock this morning, pushing it to nearly $350/share.  We discussed how ridiculous this was in yesterday morning's report but we also cautioned waiting for the madness to subside before jumping in on the short position.

We added more hedges to our Short-Term Portfolio (which protects the Long-Term Portfolio) and our Options Opportunity Portfolio, which we reviewed yesterday and we will go over all of our Member Portfolios in this afternoon's Live Trading Webinar – right into the Fed meeting and Powell's speech – so it's going to be a very exciting day!   

Yesterday,in the Morning Report, we suggested an upside hedge using the Nasdaq ETF (QQQ) 2020 $220 calls which did fill at $2.03 in the morning and finished the day at $2.20 –up 0.17 (8.4%) in day one of 583 until expiration.  This is why we don't fear missing out on a rally as it only takes a very small percentage of our CASH!!! to make sure the markets won't fly away from us.