Fed Minutes Scare Markets, For a Little While Anyway

Federal Reserve

The Federal Reserve released their minutes of their late July FOMC meeting, where they told us things look good. This outlook seems to include another bailout.

The minutes from the last Fed meeting back on July 28-29 seemed to have a chilling effect on stock markets on Wednesday, which produced a decline that carried on during after-hours trading as well. The S&P 500 had even hit an all-time high around mid-session, but it ended up giving back a percentage and a half as the market digested the minutes from this meeting of the central bank.

The minutes didn’t look that scary on their face, but ended up scaring us a lot as well, for different reasons. The fact that the Fed actually relied on the expectation for a second stimulus bill at a time where they should have understood that the chances of this happening anytime soon were slim at best is the part that is actually pretty scary, that an institution whose understanding of things are so central to our country would be so out of touch with reality to rely on such a thing, even substantially.

Our telling you all along that the probability of a second bill being passed soon was so low didn’t really take much insight, and all you needed to do is realize that the Democrats place greater value on all of the socialist pork they packed into their bill, as well as their political objectives of seeing the economy worsen right now, thinking that this will help their chances, and would have no problem walking away from the stuff we actually need to promote these other goals, the American people be damned.

This is playing out like a situation such as seeing someone homeless and starving, where both parties want to feed him, but the Democrats want to buy the guy a new car as well, and decide that if he doesn’t get this car, they will let him starve.

They don’t just want to help unemployed people keep food on the table, they are insisting that we continue to pay three quarters of them more than they made at their jobs, and if they can’t have that, they want them to just do without.

They did cut a million off of their original over $3 trillion bill, but did so in a way that they didn’t really give anything up, they just shortened the time horizon, where the substantial change is just that the old bill will come up for renewal sooner, where they are hoping that they will have more political power and then really go crazy with their spending, which they no doubt will if given the chance.

We told you that the Republicans would not be subject to blackmail again, and there’s much more in this bill compared to the first one, over a trillion dollars more. The need is a whole lot less now as well, and we quickly got to a situation where the Republicans were willing to compromise a little but not much, and the Democrats were not prepared to compromise at all. Anyone who thought a deal was imminent was just off their rocker.

We can’t afford the Fed to fall off its rocker though, and from reading the minutes, it seems that they did to some degree at least. Given that the Democrats aren’t being held accountable by voters it seems, they are free to maintain their obvious strategy of harming the economy even more than they have already, and hoping to instead score more political points.

It might make no sense to blame the Republicans for this impasse, as how dare they oppose their socialist agenda, how dare they not want to keep all those people out of work, how dare they not want to bail out all those Democratic governors who damaged their economies so much, with Trump being to blame for the damage of course.

They are having a festival now, where everything anyone may be unhappy about, from A to Z, is somehow Trump’s fault. None of their babble makes sense, but that is no longer a requirement at all in American politics. This is not about political partisanship, it is about their lack of being partisan to the truth, with person after person, including both Obamas, blaming every death and every job lost on President Trump, in a way that makes people who have brain damage look more capable in comparison.

The Republicans are doing a poor job as well, not by lying through their crooked teeth, or stooping to epic levels of idiocy, but by not really defending themselves well at all. There is still the potential for Trump to turn things around, but it will take a lot, and they need to do something a whole lot different, like doing a much better job exposing the ridiculous claims made against him and his party.

If it was in Trump’s power to order lockdowns, he would have refrained, just like South Dakota did. Even early in the pandemic, he spoke about how harmful they were and how America was not designed to be shut down, but alas, he doesn’t have any say in this as President. Somehow though, incredibly, he fought hard to oppose all these job losses but did not have the power to even slow them down, yet he is to blame for their losing their jobs. That’s stupid beyond words, and rocks have more intelligence than this because they aren’t anywhere near stupid enough to make things like this up.

There’s also the matter of Trump killing 177,000 Americans, somehow. Never mind that a virus actually did it, never mind that Trump did all he could by banning flights from China and later Europe. Never mind that Biden strongly opposed these measures and called him xenophobic at the time, and never mind that a President can do no more about this, or why they think that Trump caused a single person to die from this or a single person to lose their jobs, it’s just all his fault. They are even pinning the impasse on the stimulus bill on him, but never mind if it is the Senate that decides this stuff.

You would think that Trump stepping up and doing his best to help, seeking to bend the rules so far that he may even be breaking them, to help America recover from all the harm that has been visited upon them from the states would count in his favor. Nothing could possibly help him avoid being blamed for everything though it seems.

We’ve Probably Gotten All the Fiscal Stimulus We Will Get for Awhile

9 states have taken him up on his deal to provide an extra $300 a week if states kick in $100 a week of their own, to at least get them to pay a quarter of what they have cost their people, but South Dakota won’t be among them, as they declined, because they didn’t choose to close their economy at all and do not need any help. That should stand in stark contrast to the Democratic run states, but the Democrats aren’t interested in the truth, in whole or in part.

This is probably as good of a deal as they will get, and these orders along with the other help that Trump offered made the potential for a second bill go way down, as this is actually sufficient to keep things moving forward if accepted. States that refuse this only have themselves to blame, and if enough of their people get angry enough, their voices may be heard and they may have to reconsider, if they can recover enough from the brain bashing that the media has unleashed upon them.

This has all played out in real time in the stock markets, who have at least mostly set aside their illusions of another COVID bill, but whenever the Fed speaks, there is a knee-jerk reaction involved, and knees that get hit with hammers will jerk.

Gold took an even bigger hit than stocks did from the sharing of these minutes, and those who think that gold is protective against these things need to pay attention. Gold has been on quite a run, but has backed off lately and even more so after these Fed minutes. Gold’s giving back 6% over the last 2 weeks shows how difficult this can be to manage, as this horse is definitely wilder than trading indexes, even the wildest ones like tech, because while both horses can run, gold bucks a lot more, just like it is doing right now.

The more room we need to give an investment, the riskier it is, because you can’t just jump off every time gold starts to buck a little if you are planning on holding it for a while because this will require you to be more of a trader than you may wish or may be able to manage, and the more decisions involved, the more skilled you need to be to execute these entries and exits.

Gold’s move up since March has been a fairly easy one to play until now, but lately it is acting more like it did in March where it gave back 12%, and this is why we advised that during the bear pullback in stocks, it was too risky at the time compared to bonds if you were looking for a place to hide during this panic.

This isn’t to say that gold’s move is done right now and that would be pretty presumptuous at this point since no one can predict these things very well. It’s easy enough to predict it will continue to rise while it is rising as it has been lately, but when things start to bounce around like they are now, or if we are trying to see the future much past the right edge of our charts, this can be big challenge, although we don’t really need to look too far past what is right in front of us and this is where so many people get confused.

You do need more skills though to trade gold and it is both funny and sad that so many investors who actually want to trade gold believe it is so much easier to do than in practice. What they need to do, and what everyone needs to do if they wish to trade anything, is to look upon the past to see not only how they may have handled past challenges but to see how they may be able to refine their approaches to not only drive their returns better but to avoid situations that place us too much at risk, especially compared to trading something else instead.

Things ended up settling down in the markets on Thursday, in spite of new jobless claims rising. We finally got below a million with last week’s numbers, coming in at 971,000 jobs lost, and the expectations were that we would drop further this week, to 920,000. Instead, we saw this moving in the wrong direction, with 1.1 million new jobless claims this week.

Oddly enough, stocks brushed this off, and part of the reason at least is that we use seasonally-adjusted numbers in these reports, and while it may normally be a season of more hiring and a higher bar, normal seasonal patterns do not apply in the year of the coronavirus, and this does go a long way to explain the reversion.

Prior to this year, the old weekly all-time record was 625,000 back in 1982, which we simply blew away, and at its peak we lost 10 times more jobs in a week than we ever have. We went from 282,000 on March 14 to 3.3 million on March 21, and 6.87 million a week later, a tsunami of job losses far in excess of anything we even could have imagined before this.

People are certainly still getting laid off though even though we’re adding far less week over week now, but there is still a long way to go to even get down to the worst of all time before this year, a number that was in itself three times what we were seeing before our response to this pandemic had these numbers completely falling off the table.

The fiscal stimulus that just expired at the end of July certainly will have an effect on the economy, and Thursday’s report speaks to this, although the damage hasn’t been all that significant so far at least. If this is going to be all that big of a deal, we would probably be seeing an even higher number now, even though this is only two weeks into these leaner fiscal times.

Fiscal stimulus must always be balanced with fiscal responsibility though, and at the very least we need to confine our response to the actual need and not use these difficult times to promote other agendas that serve other purposes, valid or otherwise.

Things like PPP loans or topping off unemployment benefits do stimulate the economy, but overdoing this to the point where we are purposely keeping people out of work goes way too far. Rewarding states for fiscal irresponsibility or using these bills to promote political agendas that have nothing to do with this such as immigration reform need to at best be treated separately and on their own merits rather than looking to hold the economy hostage over them as the Democrats are still insisting on, ignores rather than seeks the measured and targeted response the situation demands.

Heads continue to shake over how stocks on the whole have held up during all this, even making new all-time highs. Even in the face of this reduction in stimulus that we’re now seeing, where the economic downturn becomes even less offset, stocks are not only not taking the hit, they continue to march forward, even if only by a modest amount.

We Need to Follow the Money if We Want Some

Investors haven’t cared about these things, and in the end, that’s the only thing that matters. Perhaps the Fed built in another stimulus bill into their forecasts, as blatant of a mistake as that was, but beyond traders knocking us down for a half of a day, the market already has seemed to clear its head and is now looking away from both that news and the other bad news on Thursday.

While many are complaining that the big recovery in stocks hasn’t been as broad based as they would like, seeing this situation as unhealthy, but it’s only unhealthy if you are exposed to a broad base of stocks, a questionable strategy at the best of times and one that is even more questionable now.

If certain sectors like tech, retail, and health care are outperforming, and other sectors are underperforming, and we complain that the market hasn’t been kind enough to the underperformers, the real problem lies not with the market but with ourselves for not being too bright.

Adding to the grim news lately is the effect of the battle between California and ride sharing companies, where the state is insisting on their contract workers being treated as regular employees, which neither the companies, their workers, or their customers want. The companies can’t really sustain their models under this constraint, which will push up their costs in a business that doesn’t have the margin to lose, causing them to either raise what they charge their customers considerably, shrinking their market and resulting in either a lot of layoffs or even their pulling out of the market.

Uber has said that they can’t manage this requirement without drastically cutting back on their operation in California, and Lyft was ready to suspend their operations at the end of the day Thursday until they were given another temporary stay on this new law. The government decided that this might not be a good time to leave so many without a ride, but that remains their intention.

This is a very good example of how Democrats seek to manage economies, where they get their pound of flesh by promoting their political ideologies but everyone suffers, but they don’t care because their ideology trumps everything. Throwing that many drivers out of work and so many people looking for more expensive options to travel is just seen as collateral damage, where their communist leaning proposals are given immunity from practical considerations.

They are so intent on these workers getting benefits that ultimately choosing that they have no job at all somehow does not matter to them. Their drivers also really enjoy the freedom that self-employment brings and many do not want to be stuck with a formal employment arrangement. It’s not what the workers want, it’s not what the customers want, it’s certainly not what the companies want, or what benefits the state economy, it’s just about what makes the legislators happy no matter who gets stepped on or how hard.

Over regulation like this interferes with the efficiency of the market, and this is a perfect example of this, where the gig economy has provided more jobs than otherwise and also allowed folks to get more for their money. We might not want to allow young children to work in coal mines for 12 hours a day, but even that makes the economy more efficient, although the impact on the children needs to be accounted as well. Whenever we do choose to restrict things, it needs to be justified, which includes putting us in a better not worse place, where everyone loses.

We have the same thing happening at the federal level with these battling stimulus bills, where they choose to help no one if their political agendas do not get promoted to their satisfaction. This is what we risk if this party is given even more power, or even ultimate power if they run the table this November, where our economy as well as our way of life gets pushed aside in favor of policies that only serve to placate radical socialism, not in a way that could even be seen to promote any sort of real conception of the greater good, but instead, the greater bad.

Regardless of what happens as we gain a better sense of what to expect over the next few years politically, we do not want to cling to a homogenous view of stocks, as the market chooses more and more to promote certain types of stocks over others. The idea of wanting to get into a good business rather than just any business, choosing based upon potential, is an idea that anyone would understand, but struggle so mightily with understanding their stock investments this sensibly or even close.

All this money that people have in stocks and want to put into them has to go somewhere, and as long as some stocks continue to perform strongly, it shouldn’t matter to us that others are not, because we can simply choose to not be in those. We should be paying a whole lot less attention to stocks overall and a lot more attention to where the good opportunities lie, where certain things may scare the market overall but they may not scare our stocks so much, or they may not even care.

This is the thinking that has people worrying or even caring about market breadth, including things like pointing out that more than half of the stocks in the S&P 500 are down for the year, or even on a daily basis like the fact that two out of three stocks declined on Thursday even though the index put in a little gain.

They actually see this as some sort of big lack, and even blame the good stocks such as Apple for it, blood on their hands it would seem, the stocks that they are afraid to invest in and are seen as responsible for their bad choices doing badly. They of course don’t get how ridiculous this view is, leading to their not only recognizing that there are stocks that are doing so much better to the point that they are jealous, but not wanting to own them as we would expect sensible people to do, but to even see good stocks as the enemy it seems. This is a symptom of losing your mind, but once you lose it, you don’t know it is gone, and there’s your proof.

Instead of hoping that reality will somehow invert, that we will see a rotation where good stocks become bad and bad stocks become good, we should be instead looking at taking better advantage of what is actually happening. If value stocks ever come back in style again, we will know it, but we need to wait for the fashion trends to change first before we start dressing like they did in days long gone by and hope that this comes back in style while our pockets get emptied.

One look at a chart like NVIDIA gives us a glimpse of what is on the other side of the big fence that we have erected, which has gone straight up since mid-March to the tune of a 151% gain in just 5 months, and has more than doubled in 2020 so far. While the broader S&P 500 might be back up to an all-time high, doubling your all-time high is just so much better. NVIDIA did fabulously last year as well, gaining 77% and being one of the best performing stocks that year as well, and this is what you call a good investment.

NVIDIA’s rise hasn’t just been over the last year or two though, and is up 4,276% since November of 2012, versus the relatively paltry 148% that the S&P 500 has gained. This is what you call beating the market, not the percentage or two in good years that mutual funds shoot for. They may tell us that they want to beat the market but their actions speak otherwise. Wanting to invest in everything comes with a very stiff price.

What really prevents them from helping themselves is their misconceptions of risk, but when your investments grow 29 times faster, even if you do give up a little more during pullbacks, this still leaves you many miles ahead at any point in time, which is what those who are drunk with index investing misunderstand the most.

We do speak about market risk as much as anyone, but being aware of these risks and wanting to take them on are two very different things. The economy has been bloodied, but our portfolios need not bleed along with it, unless we want them to, and it seems a great many do. Things may get pretty rough going forward, but we never want to let the mood of the market itself prevent us from making a lot of money if it is there for the taking. Separating the wheat from the chaff with stocks has never been so important.

Ken Stephens

Chief Editor, MarketReview.com

Ken has a way of making even the most complex of ideas in finance simple enough to understand by all and looks to take every topic to a higher level.

Contact Ken: [email protected]

Areas of interest: News & updates from the Federal Reserve System, Investing, Commodities, Exchange Traded Funds & more.