Dimon Makes Hurricane-Force Remarks, Musk Fires A Shot And Workers, CEOs See Hard Times Ahead As Their Compensation Rises
Last week the President summoned Fed chair Jay Powell and Treasury Secretary Janet Yellen to the White House for a photo-op. Biden reaffirmed Powell’s independence and blamed inflation on Putin, never mind that the annual inflation rate hit 7 percent before the Russians invaded Ukraine. Yellen blamed her mistake in thinking inflation “transitory” on unforeseeable events. A claim that suggested she had not read press reports of former Treasury Secretary Larry Summers’ warning of inflationary pressures “of a kind we have not seen in a generation.” No mention of the effect of the Biden administration’s decision to pour a few trillion dollars of purchasing power into an already over-heated economy.
The Fed Dips Into Its Tool Kit
This is the week that the inflation fight turns at least semi-serious. The Fed belatedly has said goodbye QE, hello QT. Instead of purchasing asset-backed securities to keep their prices up, and therefore interest rates down (Quantitative Easing), the Fed will be whittling down the size of its stash of those securities (Quantitative Tightening) by not replacing maturing securities. It will shrink its swollen balance sheet, bloated by over $4.5 trillion of these assets purchased since the pandemic dropped in from China, at the monthly rate of $95 billion.
The Fed never could demand, as Churchill asked of us when Britain stood alone against Hitler, “Give us the tools and we will do the job”. The Fed’s tool has been rusting in its kit while it waited for “transitory” inflation to cure itself. Clearly, it is too soon to expect this new activism to loosen what Powell calls the “unhealthily” tight job market, preferably without provoking a recession, or at least not a deep, prolonged setback.
The much-anticipated jobs report last Friday told us little about the inflation fight. The economy added 390,000 jobs in May, a tad below the recent run of 400,000 monthly job additions. Whether that is because job creation is slowing, as the Fed hopes, or because employers could not entice enough workers to re-join the work force in response to the 5.2 per cent increase in average hourly earnings, is uncertain. Biden earlier said he would be satisfied with 150,000 new jobs every month. But whether he wants that lower number before the midterm elections is not certain.
Contradictions Galore
Look instead to revealing anecdotes:
Many companies (Netflix, Peloton, Wells Fargo, Coinbase, Tesla) announce lay-offs or hiring freezes, suggesting wage increases will slow. But 11.4 million job openings remain unfilled, and exceed job hunters by 5.46 million, while applications for jobless aid fall.
A substantial two point increase in mortgage rates in the past six months ends frantic bidding for houses, causing a drop in home sales, and a 52 per cent drop in lumber prices from their high early in March. But house prices in major metropolitan areas rise 20.6 per cent in the year that ended in March.
Last month regional Feds in New York, Richmond, Chicago and Philadelphia reported declines in economic activity. But the economy grew for the 24th consecutive month, with new orders, production and backlogs increasing, although at a slightly reduced rate.
Consumer sentiment is at a three-month low. But unhappy Americans – two of three think the country is headed in the wrong direction – are jetting, dining, filling theme parks and scrambling for scarce tickets to see “Top Gun: Maverick” in cinemas despite a reported nation-wide shortage of popcorn.
There’s more, but you get the idea. Deciding whether there are early signs that Powell & Co. are on the right track, is a problem that, to borrow from Tevye, the poor milkman in “Fiddler on the Roof”, would “cross a rabbi’s eyes. Best to look for guidance to the men in the trenches, rather than the policy wonks staring at their computer screens or the intestines of their favourite fowl.
The CEO Narrative
The broad consensus of polls and businessmen with whom I speak can be summarized as follows. “Business now is good, so good that I can’t meet demand. I can’t find enough workers (restaurants in tourist areas are operating for limited hours because of staff shortages), enough airline seats (thousands of overbooked flights, shortage of pilots and crews), enough hotel rooms (no room at the inn for some customers with reservations), enough lifeguards (less than half the public pools are opening in desert-hot Phoenix). But I expect things to worsen by next year and am planning for a recession that will be mild and short-lived.” None mention rising CEO compensation.
Dimon And Musk Rattle Some Cages
Enter Jamie Dimon at a meeting of analysts and investors. “Right now, it’s kind of sunny, things are doing fine. Everyone thinks the Fed can handle it…. I’ve said there are storm clouds [that may disappear] but I’m going to change it – it’s a hurricane. Right out there down the road coming our way. You’d better brace yourself. JPMorgan is bracing ourselves and we’re going to be very conservative with our balance sheets.” This, only a week after the bank’s chief financial officer said he expects credit losses to remain abnormally low through 2023.
Dimon did add that nobody knows if the hurricane is “a minor one or Superstorm Sandy” but a hurricane is a hurricane when announced by the newly minted meteorologist through one of the largest available megaphones when it comes to the economy. Close on the heels came another business executive cum influencer, Elon Musk. He who chimed in with “a super bad feeling” about the economy, and announced Tesla will shed 10 percent of its 100,000 staff, including all those who do not return to work on a 40-hour basis. Separately or severally, Dimon and Musk got a lot more coverage than did the President’s comments on the jobs report, although Biden whipped a card out of his pocket, quickly consulted it to counter Musk’s job cut with Ford’s report of 6,200 new hires and wish him luck on his trip to the moon.
Brian Moynihan, chairman of Bank of America, took the podium at the same meeting addressed by Dimon to rebut the JPMorgan Chase CEO’s warning with a recital of the strength of consumers, who account for about two-thirds of total US GDP. The account balances of his bank’s customers have increased in the past year, even though government relief checks no longer arrive in those accounts, and their credit card balances have dropped from $100 billion to $80 billion, adding to their purchasing power.
Goldman Sachs chief economist Jan Hatzius sees “signs of deceleration consistent with what the Fed is trying to achieve”. President Biden, sees steady if slower growth ahead. Hatzius and Biden vs. Dimon and Musk. Place your bets.