Transcript:
Easan Arulanantham:
Do you think the Federal Reserve is trying to slow down the stock market? And if they do that, like what would happen?
Tom Vaughan:
Yeah, there’s been several articles on this and different speakers at conferences talking about the fact that they feel like the Federal Reserve is sort of purposely targeting. It’s, it’s a little controversial as to whether they are or not. But I will say, you could see why they might want to. And the reason is, and I’ve seen this many, many places, the two big drivers of consumer behavior are house price increases, and stock market increases. And so when those are both up and going up, and up and up, people want to spend more. And of course, the Federal Reserve is trying to slow down demand, until supply can catch up. So get, you know, this inflation, especially core inflation, and this PCE inflation, you know, back down to that two to 3% range that they’re looking at. And you know, that one stat that keeps running through my head is that household wealth in the US from the bottom of the market, and March of 2020, to the end of last year grew $36 trillion, right? And so, hey, there’s no question as to why we have all of this spending going on when there’s that kind of growth. And so the Federal Reserve, of course, is going to raise rates, which can make the market kind of rocky all by itself. But what’s been more suspicious is how drastically they have changed their verbiage. And how aggressive they’ve been with their verbiage. They used to be much more careful about what they said and how they sit, because I watched the minute by minute charts. And when the Federal Reserve, Chairman Powell is speaking or one of the other Chairman’s of the Federal Reserve Board members, you can see the impact. I mean, the market cares dramatically about what the Federal Reserve has to say. And so they’ve been saying things that have been really hammering the market. And I think it’s also a little bit suspicious that a lot of times when we’ve had big run ups, all of a sudden, we have an interview with somebody who starts again talking aggressively, they might be putting a cap on the market.
My hope is that because we have seen today, right? The core PCE personal consumption expenditure Price Index, dropped, the overall PCE Price Index dropped, right? Those are the two areas that the Federal Reserve looks at the most. They’re really trying to slow down job openings. We haven’t seen that yet. But maybe that starts, I’m hoping that some of these things that they’re trying to accomplish, peaked out, and we’re on the right trend. And maybe they can back up a little bit on some of their rhetoric, right? And keep on the markets, okay, with the path we’re on. It’s just the situation of oh, hey, we’re going to have to half point rate increases. And then they come out and say, No, we’re going to actually do three quarter or a percent or, and then the market is going to adjust down. So if they really want to bring down the market, that’s exactly what they’ve come out. And do. You know, next week, the week after one of the Fed governors would come out and say, we’re still looking at three quarter. And so you know, the market has to respond to that, usually by readjusting to the downside. So anyway, I don’t know if that’s true or not, or if they’re really going after it, but it makes some sense that they would, yeah, right. Because they, they need to bring down personal spending, at least to a certain degree. The danger is, of course, they bring all this stuff down too much kick us into recession. And then you’ve got a whole different stock market issue that’s happening. And that’s that’s the fear that the market is dealing with right now.
Easan Arulanantham:
So we think about how spending actually went up while the price went down. So like, does the Fed want to be okay with spending going up while prices are coming down?
Tom Vaughan:
Are they that’s a perfect scenario for the Fed, they would love that, right? I mean, what that means is that most likely, I was thinking about that today, this is a great point, spending is up it was up higher than expected. And then the core PCE not even counting food and energy, which are really, you know, a wildcard right now, the core PCE dropped, and dropped more than expected, year over year, especially. And so what happens there is that we’ve got this scenario, how did it drop if spending still high? Because essentially, it means demand is still there. Because there’s only two reasons I can think of number one is supply is picking up and is still coming in and coming in and slowly but surely, even with China’s problems. Supply is better this April than last April. I can see that. Right. I can see that. You know, we’ve heard lots of good things about the ports and trucking and different things that are getting better. And those types of things as far as that goes.
The Other thing is that you might not, you might have companies that aren’t raising their prices as much. And we certainly saw that with like Target and Walmart, when they came out with their earnings reports over the last couple of weeks, they missed their earnings. And really what happens is their cost went up, and they didn’t make their prices at their stores or website go up. And so there is some compression of earnings in that scenario for some companies. And so those two things are maybe slowing it down, even though spending is still there, at least in my opinion. So that’s a perfect situation for the Fed, as far as I’m concerned, compression of, of earnings could be an issue long term, right. I don’t think the Fed wants to see that happen drastically, because that’s a recessionary signal, you know, at some point in time, and that and the market responded quite negatively to that and especially the target, Miss right. Last week, so Target’s had a nice little bounce coming back as a good company. Maybe it oversold, but nonetheless, yeah, I think that’s, I think that’s a good thing. And the market is responding today, at least, you know, we’re live right now. So I don’t know where the market is. But you know, the market is has responded You know, just before the show started was up quite a bit. It was like say it was a green shirt day which which is fantastic.