Bears Growl on Wall Street, Bad News for Many is Good News for Powell, Unhappy Americans, The Powerful Dollar

Inflation is eating into the living standard of the middle class and poorer groups, the collapse of share prices is making the rich and the very rich watch billions disappear from their balance sheets. No surprise that 75 per cent of American adults tell NBC pollsters that the country is headed in the wrong direction, 20 points higher than at this time last year.

When Bad News Is Good News

The cries of pain emanating from the Citadel of Capitalism should be music to the ears of Federal Reserve Board chairman Jay Powell, but don’t expect him to say so and call attention to the fact that bad news for others is generally good news for the Fed these days. More than $7 trillion of wealth has been wiped off the books of investors, which should put a crimp in the spending habits of the better-off Americans who have been accounting for 32 per cent of global sales of luxury goods.

Add the plunge in the value of retailers’ shares in response to the inability of Target, Walmart and others to pass on cost increases by raising prices, and you have the prelude to the new play, “Bottling the Inflation Genie”, which is replacing “Inflation Is Fun” as America’s star attraction.

Applause from the Fed. Boos and hisses from investors at the realization that the days of profit-protecting cost pass-throughs are no more, a realisation that caused the recent intraday entry of share prices into bear territory, Wall Street jargon for a 20 per cent decline from a previous high.

Employers Fight To Regain Bargaining Muscle

One imagines also silent nodding of approving heads in the Fed board room at signs that the wage contributor to the wage-price spiral just might be losing steam: the balance of bargaining power in the labour market, although still favouring employees, is becoming somewhat less favourable to the take-this-job-and-stuff-it crowd. Amazon has announced that its warehouses are over-staffed. Uber CEO Dara Khosrowshahi tells staff to “treat hiring as a privilege.” Some employers are emboldened to be more insistent that staffs return to their offices. And Linkedin reports an increasing number of job offers being rescinded, especially in the high-tech area.

No Gain Without Pain

Powell says “there could be pain involved” in bringing inflation down to the Fed’s 2 per cent target, believes that the current low level of unemployment is no longer consistent with that goal, and that “Restoring price stability is non-negotiable …. We need to see inflation coming down in a convincing way. Until we do, we will keep going.”

The reasons to expect “pain” begin with the fact that the American economy remains attached to the world around it, a world in which treasury secretary Janet Yellen sees “stagflationary effects.” The Chinese economy is in deep trouble as Xi Jinping pursues his maniacal “no Covid” policy that shut down key international supply lines and Chinese markets for everything from German autos to Australian iron ore. The Russian economy is a shambles, and Putin has taken down the economy of its Ukrainian neighbour, causing severe shortages that are driving up wheat and other food prices. Europe is paying a high price for its reliance on Russian gas and oil to keep its factories operating and its citizens toasty warm. The US, adds Yellen, “is best positioned to meet these challenges,” but they certainly are not making life easier for the Fed as it seeks to minimise domestic pain.

Americans Fret, Crowd Airports, Bars and Eateries

The afflicting of which has produced a two-year low in homebuilder confidence as mortgage rates soar, and sales edge down. This foretells a drop in construction jobs, and, for the Fed, a welcome wallet-zipping prod to American consumers who are spending more with which they buy less. Many are finding they are 15-20 per cent poorer than they thought they were. Consumer sentiment fell in May to its lowest level since the 2008-2009 Great Recession. Only one-in-three believe their family incomes will outpace inflation. Gallup polls show that 40 per cent (up 8 percentage points) of Americans fear they will be unable to pay their normal monthly bills and 52 per cent (up 7 points) that they will be unable to maintain their standard of living, which they are trying to do by cutting saving to a smaller part of their incomes than at any time in the past nine years.

Fortunately for the Fed’s hope to minimize unemployment, consumers are using some of those savings and their post-covid get-out-of-jail-free cards on services, which put less inflationary burden on the economy than stuff (think, cars) affected by supply-side bottlenecks. They are filling airplanes, restaurants and hotels, despite soaring fares, menu prices, and room rates. Without stretching their finances: only 2 per cent of credit-card holders are 30 days or more behind in payments; during the Great Recession in 2009 those delinquencies came to 7 per cent. It should be noted that subprime borrowers are struggling: delinquencies (over 60 days0 have been rising for eight months.

CEOs Predict Hard Times But Remain Calm

Meanwhile, 57 per cent of American CEOs surveyed by The Conference Board anticipate a “very short, mild recession” with inflation coming down “over the next few years”. Only 11 per cent predict a long, deep recession. Former Fed chairman Ben Bernanke foresees a period of slow growth, a bit of a rise in unemployment, with continuing inflation.  “You could call that stagflation,” he adds, calling up a word coined by one-time chancellor of the exchequer Ian Macleod in 1965.

The Dollar Might Help Pilot Powell

Powell has an ally in the strong dollar, which is keeping the price of imports down and reducing pressure on the economy to produce goods for export. That is partly the result of an inflow of European investment, up 133 per cent last year over 2019 according to the OECD. America has its problems, but nothing like countries who ignored Ronald Reagan and succumbed the to the pitch of Russia’s million-a-year gas salesman former Chancellor Gerhard Schröder,

Goldman Sachs estimates that the strong dollar and falling share prices have already produced the equivalent of a 2.25 percentage point increase in rates, compared to the mere 0.75 percentage point increase the Fed has ordered. But there are more to come. Best to fasten your seat belts as Powell attempts to pilot the economy to a soft landing, ignoring critics who say he is like the pilot who comforted passengers with the announcement, “We’re lost, but we are making good progress.”

Unless storms force him to end the flight and return the plane to its hangar for a re-fit.