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VRA Investing Podcast: Understanding Today’s Fed Meeting. Growth, Inflation, and the Fed’s Policies – Kip Herriage – May 01, 2024

In today's episode, Kip dives into the aftermath of today's Federal Reserve meeting, critically analyzing Fed Chair Jerome Powell's performance and the central bank's ongoing policy decisions. He also explains why the soundness of ...

Posted On May 01, 2024Episode 1376

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About This Episode

In today's episode, Kip dives into the aftermath of today's Federal Reserve meeting, critically analyzing Fed Chair Jerome Powell's performance and the central bank's ongoing policy decisions. He also explains why the soundness of the U.S. economy and the pioneering forces of the fourth industrial revolution suggest optimistic prospects for growth and investment opportunities.


Don’t look back because the market is closed. Good Wednesday afternoon, everyone. Kip Herriage here with the daily VRA investing podcast. Hope you had a good day today.

It is Wednesday today is it? And we know that because today is Fed day. Yesterday, of course, the FOMC meetings began today. We got the result of that with the Fed statement and Jay pals press are always the edgier seat kind of a thing, isn’t it? Actually, I gotta tell you the truth, he’s kind of grown on me. Yeah, he’s made five, they’ve made five major policy errors since Powell’s had this job, by the way.

Powell got the job because Trump put him there, but he’s made five major policy mistakes. Of course, the biggie, which Tyler talked about yesterday and his great dissertation, of all the mistakes that the Fed’s made is a transitory inflation. That’s the one everybody remembers. But I think it’s pretty obvious if you watched today, and if you didn’t, don’t worry, we’ve got the results for you. What’s obvious to me is the Fed is determined not to make another major mistake. That’s why my takeaway from today, by the way, I got to give Jay Powell credit. I give him a standing ovation, he gets an a for me on the job that he did at the presser today. He stayed on script, he stayed committed to the message, which is we’re staying the course.

Steady issue goes. That was the, that was the message today. And most importantly, data dependent, which is what the Fed should always be. Right? Data dependent. What he sees now is what I think he should see, which is there’s a lag effect. There’s a long time lag effect. The great economist Ed Hyman at Evercore talks about this all the time. There’s a lag effect of about 18 months, twelve to 18 months before the Fed’s policies really start to work.

And that we’re there. We’re there from the time they start raising rates. So think about this, folks. People have been looking for a rate cut now for well over a year. The first red Fed rate cut was supposed to happen in the first quarter of last year. That was it first started to happen and it didn’t. Obviously, the SPF hundred is up 30%, more than 30% from that date. So you tell me, does the market care about rates? I don’t think the market cares, not really.

Now, obviously, if we get past 5%, 6% on the ten year, now we’re talking about a different story. But I think we’ve got a lot of evidence now that the Fed current rate coverage of five to five and a half percent on the Fed funds rate is not a market impediment. Don’t we have that evidence in front of us? Does the market seem to care? No, the market doesn’t seem to care. I’ll tell some of that more in a moment. The funniest part, and I think the most telling for me about today’s statement, when Powell got a question about the latest buzzwords is coming from the geniuses on CNBC and Bloomberg and elsewhere that, oh, my God, we have stagflation. I’m sure you’ve heard it. I’ve heard it. It’s the new buzzword.

It sounds like a scary kind of a word, doesn’t it? So Powell was asked that today about a report. He was ready. He was ready for the answer. He said, I don’t understand where these concerns about stagflation are coming from. He goes, we don’t have the stag or deflation. Stagflation in the 1970s was 10% employment and high single digit inflation with very slow growth. Right now we have 3% growth, GDP and inflation, that’s under 3%. So again, I don’t see the stag or deflation.

Great answer from Powell. He’s exactly right. We could be, we really could not be further away from what is called stagflation. I think the next time you hear someone say that, you’ll realize you’re talking to someone that likes using buzzwords but doesn’t know what those words actually mean. Let’s put that to bed. Doesn’t mean it can’t happen in the future. But right now, we don’t have it. We don’t have hyperinflation.

We don’t have stagflation. We have a strong economy. These are unpopular statements, and Tyler and I understand this, okay? We hear this all the time. What are you talking about? The economy is strong. What do you mean? That the economy, consumer and american companies hadn’t been this strong in decades? What are you talking about? Well, folks, we’re talking about facts. That’s what we deal in, facts. Economic realities. Right.

Market realities. And that’s why do you think the market’s been going up? The market’s been going up because of the strength of the economy, because of the strength of the consumer and because, yeah, we went through the plan, demic, of course, which was a planned epidemic. We went through that and increased money supply by 40%. That’s never happened. Before in the country’s history. All right. Increase in money supply of 40% is still filtering through the system. We still have unspent plandemic money from Trump’s administration that still hasn’t worked its way.

Remember, this is all scheduled to be released into the economy over several years. Obviously, only about, I think it’s, I think, alas, I saw only 40% of the budget money that Biden’s had approved will be released into the economy over the next three to four years. It’s still got years to go again. We still have some of Trump’s money that’s still being released to the economy. So instead of asking Jay pal what they can do to stop inflation, maybe it’s time that we started asking our congresspeople what they can do. Because it’s all money printing, folks. It’s all money printing. And that’s why inflation is going to remain sticky.

I wished it wasn’t, but we were at. What’s the official, last official read? Was it, we’ll call it 3% to round up, around down. We’re right around 3% inflation. The Fed’s targets, 2%. Will we get there? Probably not for a while. But at the same time, we have a very strong employment. We still have more people looking for jobs and jobs available by a pretty large number. Right.

Wages are growing by 4.2%. Productivity is growing by 3.7%. This is strong economic growth. Homes, home values, all time high net income. Excuse me, net consumer net worth, all time high. Net equity in homes, all time high. One third of Americans own their home without a mortgage on it. All time high again.

Consumers have cut their debt to disposable income by 25% in the last 15 years. And companies debt to market caps trading at 50 year lows. This is what we’re talking about. This is why the market’s going up. And now throw all that on fuel on the fire. We’ve got the innovation revolution, the launch the new industrial revolution, the fourth industrial revolution underway now, which is going to, I think, GDP growth is only going to grow from here. I know this sounds like heresy to people that hate Joe Biden, and I understand that, okay? I’m not, not a fan of his either, but I am a fan of reality. And the reality is, as much as you may hate, as much as you may hate hearing it, as much as I may dislike having to say it, the reality is we are entering economic boom times.

This is what the market sees. This is why the market’s been going gangbusters and it’s why we believe it will continue to go gangbusters as the best opportunity for Americans to build significant wealth in the markets since the 1995 to 2000 dot melt up. That’s where we are. That’s what we’ve been saying here now for 20 months, since we published the big bribe. Only because it’s the truth. I mean, this is, again, this is the reality of where we are. Can things turn on diamond get worse? Sure they could. We have so many things.

And I get that the risks are everywhere. They always are everywhere, right? There’s a black swan lurking under every bed. I understand that. But what we have to work with today, this is a very vibrant, strong economy that we believe is only going to get stronger. And the lag effects of the Fed’s rate hikes, again, the Fed funds rates at 5.5% is going to begin to have an impact on the economy. I want to just go over a couple of things here before I get to the markets today that we think are important. And again, you’re hearing very few people talk about this. Okay? I mentioned a minute ago, we’ve got wage growth of 4.2%, again, inflation, 3% or less.

Okay? Consumers are coming out ahead, if you believe the official data anyway. And then we’ve got, again, productivity growth is at 3.7%. These are pretty remarkable statistics here that we hope continue to be the case. Again, we’ve entered the fourth industrial revolution. Not enough people, very few people actually are talking about this. What that means when you see the largest tech companies in the country, right, spending $100 billion, reinvesting $100 billion into their own company. That’s code for this is economic boom times. This is financial boom times for us as investors.

And another kind of a simple parallel, I was in Las Vegas a couple weeks ago, and it’s just on fire. I mean, if you’ve been in Vegas, you know, I’m talking about all the locals tell you, we just, this is, they hate it because they are so busy, but they also recognize what it means for the economy. There’s an old saying, when the Las Vegas economy is strong, recessions do not happen in the United States. And so there are a few takeaways from that. And again, from what is the innovation revolution, as we’ve called it? Again, tech companies investing over $100 billion in their own companies. These are all code for the economy is on fire. We got another one, too. Doctor copper.

Todd and I have been talking about this for a while now. Doctor copper. Copper is sword. Of course they call it that because it’s a great forecasting mechanism for the global economy, not just us. For the global economy. Over the last year, copper is up from 351 a pound to 455 a pound. Okay? I mean, we’re talking 50% growth in copper in one year. It moved higher in one year.

This tells you that we have a strong, not just us, but a strong global economy. Now, what’s interesting about that is that, yes, while we have the ten year at four point, it fell below 4.6% today. Ten year yields fell on this press conference today because again, the Fed staying their course, they know what that’s going to result in. It’s going to result in eventually lower rates and hopefully lower inflation. But what this also means is that we’re probably not going to have to compete with what we saw in the 1995 to 2000 melt up, where the ten year yield averaged higher than 6%. Even with the strong global economy, right. Even with inflation, where it’s been 6% was the ten year yield average with some spurts above 7%, and then 95 to 2000 melts up again. Today we’re below 4.6%.

So if the markets can boom during melt up with much higher rates, why can’t we? Now, I think that’s, that’s, I think it’s a fair question. Also, remember, the whole rate thing is about gravity. This is the way we presented it for a long time. Us rates are too high, they’re restrictive. There’s no question about this. And why will rates continue to fall? We call it gravity because two things control interest rates. The flow of money, right? Primarily institutional money flows. Are they buying your bonds? Are they selling your bonds? And central banks, what their desires are.

With this in mind, if you listening today, if you were in charge of institutional investing for a major investment firm, a major bank, what have you, what would you rather invest in? Would you rather have your money invested in ten year debt yielding 4.6%, or german ten year debt at 2.5%? Would you rather get 4.6 or 2.5? I think kind of an easy question to answer. Yes, I’ll give you an even easier one. If you’re running institutional investing for a major investment firm, would you rather invest your firm’s money in US ten year debt yielding 4.6%, or japanese debt tenure also yielding 0%? Because that’s where their yields are. So it’s that the flow of funds, the gravity of supply and demand of money flowing into the US to get our higher yields before they fall lower. This is what’s putting a lid on rates and why rates are not going to skyrocket from here. If that sounds too simplistic for you, I’m just here to tell you that’s how it works. Right. So again, we think we can make a very strong case the rates will continue to fall, that the innovation revolution we’re in, which is full of disruption.

Right. Innovation disruption, what does it do? It brings prices down. That’s called deflation. Right. As Europe and China are now experiencing broad either deflation or disinflation as their rates are falling. Ours will follow in that vein. Bottom line is Jay Powell is exactly right. Stay.

There she goes. Stay the course. Only be data dependent. All of that, we believe, adds up to a great setup. Continued to be in place for us equities and for us markets and for the US economy. So we’re very optimistic here. As you know. As you can tell, a lot of people talk about this.

Tyler, mister, yesterday the old saying seller may go away. We share this morning not the case. At least nine of the last ten years, the market has been higher in the month of May, 9 of the last ten years. We think that continues this year. Great setup. Now, Tyler just shares with me, the last 13 days, the fear and greed index has been in fear territory, folks. A month ago it was an extreme greed. Now spent 13 days in fear territory.

Again, sentiment has flipped. All it takes is a couple of weeks of selling and there go all the bulls and here come all the bears. And that’s just not how the markets work first, folks, that’s why it’s so incredibly powerful to be a contrarian, especially at the extremes. Not that we’re at the extremes today, but folks, we did just get to extreme oversold on the semis. They just blast their biggest buying opportunity since the, since the October 2022 lows. So this is a great opportunity for our market leader, the semis, which, by the way, we’re down today on AMD’s earnings and video followed down almost 5% at one point today. Yeah, the semis led lower today. We don’t like seeing that, but we also don’t see that as a trend.

We think it’s probably more than anything a short term reaction to earnings. And again, the anxiety that was felt about today’s FOMC statement. All right, today the Dow Jones did finish up, folks. At one point we were up over 500 points. We’d been down big time earlier as well. But the Dow did finish up 87 points. Kind of a disappointing day if I’m being honest, would like to have seen more from a very dovish Jay Powell today. By the way, there are some other external things happening.

A bit of a gold was hit hard yesterday, bitcoin below 60,000, now 57,000. I’ll talk about that more in a moment. So we did have some liquidity kind of a feeling about this, which, by the way, is not the strong. It’s not a sign of the strongest economy possible. I’ll just throw that out there. There’s something also, the Fed is tracking instant liquidity. When events like this happen, where does the selling pressure take place? If it happens in gold, if it happens in bonds and it happens in bitcoin, that’s a sign of liquidity not being as strong as some people might think that it is. That’s what the Fed’s watching, folks.

This is why the Fed is not going to hike rates. This is why the Fed will be cutting rates, I believe, still two to three times by the end of this year. We’re sticking to our forecast from earlier this year. Roast 2000, it was up three tenths of 1%. That was our winner on the day. SB 500 was down three tenths of 1%. Nasdaq today also down three tenths of 1%. And again, the ten year today finishing below 4.6% on the yield there in our eternals today.

Pretty good internals, actually. The advanced decline for both the NYSE and Nasdaq, both positive, not two to one, but one and a half to one. Positive. Volume also positive today, 54% of volume. NYSE 58% of volume on Nasdaq. And finally, our 52 highest lows essentially came in flat today, again, turned out to actually be a bit of a slow day today. The sector watch, with all the excitement, sector watch today, we had five sectors finished higher, six finished lower. Not much in either direction, really.

Utilities up 1.1%, energy down 1.6%. And our commodity watch today, gold today, again, gold was down like $50. Announced yesterday. Recouped over half of that today, closing up $27. Announced at 23.30. Silver up. And that’s, by the way, that’s 1.1%. Silver up right at 1% today at $0.27.

Announced at 26.92. Copper again, doctor. Copper, incredibly strong. Was actually flat today at 456 a pound. Crude oil today was down. This is why energy stocks were down. Crude oil down 281 a barrel. That’s 3.4%.

That’s a 79.12. And finally today, bitcoin today. I just told you the price. Right, let’s go over that again. Last trade in bitcoin is 57,575. Had a range of below 56,000 at one point, high at 59. Five during palace presser. Again, last trade here, 57,577.

I want to tell you what’s going on here. First of all, some technical damages have been done. When bitcoin fell below 60,000, that was an area of support. It tried to crack that line several times. It did it overnight, again, hit to a low today just below 56. Two reasons disappointing, really. Demand from the Hong Kong approvals of bitcoin. The ETF’s in the short term, they expected more demand, some issues for mainland Chinese being able to buy these ETF’s.

Some confusion around that. And again, plus the short term technical action. Folks know this short term bitcoin is being dominated now by futures trading. Can’t fault them. This is what they do. And now we have a nascent market in these ETF’s. It’s a new market. Everyone’s trying to fill it out.

In other words, it’s easy, easier for these futures traders to push bitcoin around. But that is a short term, that’s a short term benefit for them only. And we’re also seeing that bitcoin is doing what it’s actually done. In the post havings. Again, we had just had it. So fourth, halving. In the past, bitcoin has put up an average gain of 19% in the month before the having took place with the gain of just 1.7% in the month following the having. So it’s kind of following course here.

But we remind you what matters most. First of all, bitcoin on the past three halvings has had an average move higher of 3200, better than 3200%. Again, that’s the average move of the previous three havings. Obviously just had the fourth having. So our advice again, we’re kind of a broken record here. Just as a reminder, we first recommend recommended bitcoin in 2000. In 2017, we then sold it at 58,000. Then we root at 21 in 2021, then later in 2021 when it crashed, we recommended bitcoin at 28,800.

And we’ve been long since then. Bitcoin’s been very good to us. We think it’s going to continue to be what we recommend and so we don’t get caught up in the day to day craziness of this trading, again dominated by futures traders right now, is to use monthly dollar cost averaging. This is what we recommend to our. To our clients, to our members, to our subscribers, use monthly dollar cost averaging as we do with our favorite growth stocks. This is where you’re not caught up in the mania of the day to day and overnight trading in bitcoin, our target, my target remains 100,000 on bitcoin by the end of this year. I think it frankly happened a lot sooner because when these futures traders get on the wrong side of bitcoin as demand continues to soar, and that’s what’s going to happen here, you’re going to see the inverse of this action take place. You’re going to see a melt up occur.

So I would tell you again, look, we’re long and strong. We think bitcoin is a great play here. Ignore the short term insanity. Use monthly dollar cost averaging to add to positions, because that’s what we are doing here. All right, folks, that’s it for today. Always appreciate you listening. Hope you had a great day. Near a better night.

We’ll see you back here again tomorrow after the close. Bye.

Podcast Newsletter

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Time Stamps

00:00 Fed rate coverage evidence supports market sentiment.
06:25 Consumers and companies reducing debt, economic boom.
10:12 Strong global economy; lower rates and inflation.
11:43 Institutional investing choices: high vs. low yields.
15:18 Gold and bitcoin prices drop, liquidity concerns.
19:59 Bitcoin's success, advocate dollar cost averaging. Target: $100,000.
21:10 See you again tomorrow after market closes. Goodbye.

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