The big question of the day: Will the Fed succumb to Wall Street's myopia and misreading of the American economy? Or will it stand down and resist its own ill-advised notions of raising interest rates in America?
As I have been saying for a while now, I believe the Fed will ultimately recognize that our economy, for all its supposed strength, is a paper mache creation that seems solid and firm from the outside but which is hollow and air-filled inside.
Sure, that's certainly more than a bit hyperbolic. We are the world's Big Kahuna, and our economy is real and more dynamic than most. But the hyperbole emphatically makes my point: For all our outward strength, large swaths of the American economy are sclerotic and atrophied... and worse, those are the parts of the economy that are most important but also most hidden.
I'm talking about the parts of the economy that aren't Wall Street.
The Street is lost in its own self-interest, Narcissus gazing longingly at his own beauty, never realizing the watery mirror he's looking into is a puddle of human waste.
As I pointed out last week, the much-ballyhooed U.S. labor is not what the media, cheerleading economists or the presidential administration paint it as. Our 4.3% unemployment rate might imply a strong labor market, but the jobs underlying that low unemployment rate are largely low-wage jobs and largely in the services sector, where income growth is tepid.
Simply put, having a job in America today is not like having a job in America when my grandparents raised me in the 1960s and '70s, or when I joined the workforce in the late '80s and '90s. Just because you have a job today doesn't mean you have real income or that you're a happy and productive member of the consumer class. It just means you've found a way to, at best, survive while you hope for something better.
Today, 51% of American workers make less than $30,000 a year - about $14 an hour. The scary fact: the average auto loan in America today is more than $30,000. So, most of the country doesn't even earn in a year what they're spending on a decaying asset. The average note on that car now exceeds $500 a month.
On top of that, the average American pays $1,231 a month for an apartment, while the average homeowner shells out $758 a month on a mortgage. The point being that the combined cost of a car note and housing consumes well over half the average American's take-home income - and that's not a healthy number in terms of that consumer being able to afford discretionary spending after factoring in utilities, food, gasoline and healthcare costs. (By the way, raising interest rates would make housing and cars even more unaffordable, which would certainly hit the economy.)
Those plot points say a lot about all the jobs the American economy has created. While those jobs exist in big numbers that politicians like to crow about, they're simply not jobs that build a middle class.
Which explains why our middle class is shrinking, and has been for years. In the linked Pew Research Center report, 203 of the 229 counties studied are losing their middle class. Pay - a direct reflection of the jobs available - is the primary culprit.
Consider this chart, based on Bureau of Labor Statistics data:
The line depicts what the average worker earns on a weekly basis, based on constant 1982-84 dollars (to help keep the comparisons apples to apples). We've seen a nice boost over the last four years, which, no doubt, makes some in the economic community giddy. But the broader reality is that since 2007, real wage growth has been a very meager 0.41% a year, on average. Wonder why so much of the middle class feels so oppressed, is so angry and so eager to overturn the political establishment? That wage growth has a lot to do with it when they see the party on Wall Street.
It also explains why the American middle class has to rely so heavily on debt to live what I'll calls lives of desperate aspiration.
This, then, is where I struggle with the notion that the Fed will raise rates.
I realize rates are ridiculously low. I realize that rates should have risen long ago. But that didn't happen, and now here we are, demonstrably in a worse place. The consumer is far more indebted today than in 2012 and 2013, when rates should have started inching higher. Now, even a little bump up will absolutely have impacts. We might not see it immediately, since ripples take time to cross a pond. But we will begin to see the impacts.
Spending will slow even more in the consumerverse, as Main Street America - to which Wall Street is deaf and dumb - will have to allocate more of its meager monthly take-home pay to debt service. This part of America, after all, has no savings to draw on. Instead, it struggles from one paycheck to the next because 60% of the country, it turns out, cannot afford even a $500 emergency.
Retailers, restaurants, auto dealers, certain food stores... they will all suffer as patrons scale back their buying out of debt repayment necessity.
Retail sales will flatten or sink. Corporate profits will begin to weaken. We will see layoffs. Consumer sentiment will flag... and suddenly, what is supposedly a buoyant economy will be back to struggling to stay afloat without Fed intervention.
The Fed can simply skip all that sturm und drang, stand pat for the moment and wait to see if the Trump economic agenda really does pay off with higher GDP growth and higher wage growth. If so, then that would give the Fed some cover to raise rates gradually, since the impact of higher rates at that point would counteract the possibility of higher inflation, and we'd generally balance things out. (More money would not be chasing the same quantity of goods - i.e., inflation - because the higher rates at that point would have more money servicing debt instead.)
At the moment, though, there's no reason to try to front-run the Trump agenda. That agenda is in such tatters and so disjointed that there's no way to gauge whether it will ultimately squeeze or expand the economy. In fact, front-running Trump means the Fed potentially makes the wrong call.
What happens, for instance, if Fed governors raise rates, yet Trump's agenda on taxes, tariffs, trade, etc. turn out to be less expansive and more constrictive? The Fed's rate hike today will, in the future, have proven bone-headed because it will have exacerbated the problems of tomorrow.
The question I have is this: Is the Fed paying attention to this part of our economy? Is the Fed paying attention to Main Street and the impacts its actions will have on real consumers? Or is it simply preoccupied with appeasing Narcissus?
I have to believe the Fed is cognizant of the real consumer. I have to believe it sees that to which Wall Street seems so oblivious. For that reason, I think we get no rate hike today and Fed language that aims to steer the Street toward expectations of a less aggressive approach to rate hike moves until there's a clearer sign of where this economy will go under the Trump agenda.
I'm not one to make bets in moments like this, because it's impossible to know the political and Wall Street pressures that are weighing on the Fed internally. But if I were a betting man in this moment, I would be:
- Shorting the dollar over the very short term (a few days) with PowerShares DB USD Bear ETF (NYSEARCA: UDN); and
- Feeling bullish on Treasury bonds, which will rally. I'd be looking at the iPath U.S. Treasury 5-year Bull ETN (NYSEARCA: DFVL).
Certainly, I could be wrong on all of this. The market certainly thinks I'm a fool, given that there's a near-100% certainly the Fed Funds rate will end today at a range of 1-1.25%, meaning a 25 basis point increase.
Who knows? Maybe Mr. Market is right. (He has been wrong many times in the past.)
But if he's right this time, it will simply mean the Fed is not paying attention to the real economy. It's focused on Wall Street, not Main Street... because on Main Street, the real economy is a paper mache tiger growling with the voice of a cub.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.