Careful What You Wish For: Perhaps the Fed Should Raise After all

Friday’s reversal calls into question the desirability of a Fed pause.

Follow my thinking on this one:  The same people who have been begging, wheedling, whining for the Fed to s top have now realized what it was they actually wished for:   An official Fed acknowledgement that the economy has slowed — dramatically.

It turns out that’s not a good thing. As the economy slows, expect revenues to soften, and profits to get hurt.

I find it hard to imagine that is good for equities. The weakness in the Trannies today was an early clue that the economy is softening. The bond market seems to agree, with the 10 year down to 4.9%.

At this point, perhaps the market  would be better off with a single final rate hike — thus reassuring all interested parties the Fed still has faith the economy is just fine. The accompanying Fed statement would then imply that they are done, and that markets can expect a pause in September.

This would be far more desirable than the Pause/Resume scenario we laid out in April.

Of course, all that does is delay the inevitable. My views remain the same: The economy is now slowing, and inflation is not only present, but very possibly accellerating. Doug Kass calls it the "Sour Spot" — the exact opposite of the goldilocks sweet spot.

The only question is for how long and far can investors rationalize this, and maintain a long bias.

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  1. FliteTime commented on Aug 7

    I say Big Ben raises one more time, just to spite us.
    Remember that he has his OWN name to make for himself?

  2. Craig H commented on Aug 7

    Sour spot? No, that sucks.

    I officially dub this economy “Snakes on a Plane”.

  3. Craig commented on Aug 7

    One more for Neville.

  4. BenB commented on Aug 7

    The Fed has OVER-tightened ….. the economic #’s recently have all missed to the downside , the GDP collapsed in the 2Q and will be lower in 3Q , 4Q …….. and yes , inflation is a lagging indicator , as it always has been ………. Fed Funds futures imply a 15% chance of increase for a reason , and the 10-year yield is at a 4-month low for a reason

  5. kharris commented on Aug 7

    Let’s see now. When you thought the Fed wasn’t going to pause, you spilled great pools of bile in the direction of those who did, lumped them all together into a single herd and dismissed them as mindless. Now, the possibility that the Fed may pause seems more plausible to you. What do you do? Accuse the people who may turn out to have been smarter than you of begging, wheedling and whining. No “wow, I could be wrong.” No “gee, they might have been right.” You have often said you are the first to admit error. You recommend it to your readers. Now, your way into changing your view is to belittle the people who may have gotten it right.

    When I first started reading your stuff, it seemed halfway intelligent. Not any more. Much of what you have to say is “me smart, they stupid, nyah, nyah, nyah.” No thanks.

  6. Tim commented on Aug 7

    C’mon, Barry, you’re better than this one: “At this point, perhaps the market would be better off with a single final rate hike — thus reassuring all interested parties the Fed still has faith the economy is just fine. The accompanying Fed statement would then imply that they are done, and that markets can expect a pause in September. ”

    Not happening. The Fed is done – they will not raise it again for the mkts benefit. Remember, they’ve been doing this for almost two years. They need to stop now so the reverse process can commence. In other words, while the economy is indeed slowing, it is doing so in large part due to RE and all of its related impacts. Thus, the sooner they stop, the sooner RE can go about its bottoming process, which will likely take years anyway – but flat rates or even rate cuts down the road will help stability.

  7. Car commented on Aug 7

    I remember when everyone on the site killed Ben ……. ” Neville Chamberlain ” … now we could be OVER-tightening …. what do we call him next , Mussolini ….. and , Doug Kass has killed more investors than Pol Pot ever did …. he’s a stopped-clock

  8. Spectator commented on Aug 7

    Has it occurred to anyone that the Fed has been pumping liquidity into the system through all these baby step moves. Heck, they dont even publish M3 anymore!

    The market and all that dumb money sloshing around wants to move higher despite bad fundamentals. The only cure is to give that dumb money a serious haircut.

    But Bernanke does not have a spine, so expect more liquidity and serious inflation ahead. And beware of misleading market signals from excessive dumb money.

  9. Matt commented on Aug 7

    Do you have any simple asset allocation guidelines for weathering the next few years? Is there any way to publish such advice this without crossing obvious legal/business boundaries?

  10. ss commented on Aug 7

    Well said kharris.

    Earnings are coming in just fine thank you.

    Perma bear is as perma bear does. We need more shorts.

  11. Mark M Up commented on Aug 7

    I agree with spectator…the FED has been tapping
    the brakes-raising short term interest rates and
    has the other foot pushing the accelerator to the
    floor-increasing the money supply. The bottle of
    nitrous-home equity withdrawl is slowing down
    so they(we) now have the main dilemma……

  12. jim commented on Aug 7

    It must be a full moon.

  13. Chief Tomahawk commented on Aug 7

    “It must be a full moon.”

    And thin air – oops, I mean volume!

  14. BigBen commented on Aug 7

    Was a good study a year or so back on what the Fed fights. No. 1 on the list by a huge margin was wage inflation. Almost has blinders on when looking at wages. With wage inflation still rising and at levels not seen since early 1990s, I don’t think the Fed is done. They will need to see more heads roll in the job market and the unemployment rate at 6%. If they do pause, they are going to have to come back and slay the wage dragon later. Also at what point does energy become non-inflationary? Oil at $80? $90? $100? or $35 to $40 like the fools Forbes and Lauffer are talking about. If oil goes to $35 we would have to be in a depression likes we have not seen since the 20’s.

  15. HT commented on Aug 7

    Bernanke is in an intractable problem. Reasons to pause: weakening business cycle, pressure from the GOP for dire November elections. Reasons not to pause: inflation. Well above his 1-2% target [that know one talks about anymore], and as some one in the camp that the CPI grossly understates real inflation [as i am], high by any standards. Arguments of whether it’s backward or forward looking confuse the issue.

    What will he do? Don’t know. But the Feds one and only real mandate is to contain inflation. Period. If he over tightens and there is a recession–big deal–they happen, get over it. If the inflation train picks up speed, things will be much worse.

    Last year, I felt we were in a rare win-win trade environment for gold, oil, commodities and emerging markets that made them. win-win because it was hard to see what could happen to derail the trade for some time. geopolitical risk up? good for the trade; inida/china booming, ditto, inflation worries, great. etc. Did well.

    now, i think we are entering possibly a lose-lose environment [which is just as valuable as a win-win, but doesnt make you feel as warm and fuzzy inside]. namely, regardles of what the fed does, there is a bad outcome ahead in the next 6-9 months.

    Playing it with bonds is iffy, if scenario of inflation runaway hits, bye bye NAV, as hat would require emergency tightening. So, for the timid, its cash @ 5%, and for the more intrepid, a bit of gold for currency/inflation hedge, and for the strong, add shorts/puts on the equity market.


  16. Barry Ritholtz commented on Aug 7

    KHarris —

    I don’t follow your criticism — I mocked people for saying the Fed was done for the past 14 months. And, it turned out the Fed was NOT done over that period.

    How do you get to the point that this crowd was right? You couldnt get wronger than the One & Done crowd.

  17. Alaskan Pete commented on Aug 7

    I think Barry has been rather clear and consistent: The hike or pause itself, with respect to its actual effects, is almost meaningless. The expectations are everything.

    The same people who were, yes, wheedling, whining, and crying for a pause are the same who argue the economy is just fine and housing will keep chugging along and corporate profits and balance sheets are fantastic, and a capital spending binge will take up the housing slack, because rates are “historically on the low end” and…..look! A Unicorn!

    The larger point here is that those pleading for the pause think it will somehow allow the economy to roll on down the tracks, whereas the bearish camp believes it doesn’t matter whethere you hike or pause, at this point slowdown is on the way. The only effect is in inflation expectations.

    God’s own Keynsians on white horses with angel wings singing onward christian soldier still cannot defeat the business cycle. Further, I would argue that the way credit is generated in the US, the FED action provides little, if any, constraint on the actual money (credit)supply. Goverment deficit spending is the creator of liquidity at the margin. M3 is still running ~ 8%, in line with the eurozone, Britain, etc. Whether the govt publishes it or not, you can recreate M3 to a very high level of confidence, most of the raw data is still available.

  18. Psy commented on Aug 7

    your ad hominem attacks are what annoy people…..
    you’re the PRO here we’re the novices
    we may be wrong , but it doesn’t deserve the wackage that you put on people every point of view isn’t always right , are yours ???

    BR That’s a fair criticism — sometimes in my zeal to attack an argument, I do flirt with the line (i.e, I probably was too harsh Ed Yardeni).

    There are occasions when I should pull out the broadsword and lop off a head — but for most of the times, all that’s needed is a chart or a table.

    I still on occasion forget that the readership has blossomed to what it now is; For years, it was a few 100 people a day, and I could go off on a rant with no repercussions. I Gotta remember that the megaphone is larger now . . .

  19. albiegf13 commented on Aug 7

    I don’t know if it is appropiate since I am new to these posting sites. Please let me know if I have in fact violated spirit of this or any other site by posting this quote from another site. I picked this up this morning on…..

    Greg Mankiw’s Blog
    Random Observations for Students of Economics

    “Monday, August 07, 2006
    Feldstein on the Fed
    In today’s Wall Street Journal, my Harvard colleague (and former Ec 10 head) Martin Feldstein says the Fed needs to risk recession to keep inflation under control:

    A mild slowing of economic growth is generally not sufficient to reverse rising inflation. That generally requires a sustained period of excess capacity in product and labor markets, with GDP growth falling significantly or even turning negative….

    The Federal Reserve has a difficult task ahead. It is understandable that it would like to achieve the soft landing of low inflation with continued solid growth. But that may not be possible. And if the Fed wants to convince the markets that inflation will be contained in the future, it must show that it is willing to take the risk of tightening too much.”

    Again, I apoligize if I have offended anyone…

    Many thanks,


  20. Ken commented on Aug 7


    Could you please explain to me why the sectors that usually lead a sustainable market advance are lagging behind instead? If the markets are so bullish, why
    can’t the Midcaps , Russel 2000 , Nasdaq , QQQQ, and SMH stay above their respective daily 50 ema?

  21. ss commented on Aug 7

    “Sarcasm alert: I guess this mean that the Fed is ready to pause . . .

    As we noted on July 21:

    “One and Done crowd may have finally gotten their wish. This Ship of Fools have been behind nearly every failed rally of recent vintage … as history has shown us more often that not, when the Fed finally stops it is because growth has slowed to the point where inflation has been tamed, but at a cost of setting the economy to the point of contraction.”

    Which is it Barry?….are they done? (Sarcasm right back at you)

  22. ss commented on Aug 7

    Great question Ken.

    I see the banks defying the bear case very well, despite the lack of spread. That is important leadership. Each of the indices you mention were the leaders of the “past”, and have gotten spanked as their higher PE’s became a target.

    I didn’t say this is a bullish market…it’s dreadful! Psychology (as this blog clearly shows) couldn’t get much worse. That’s when I buy stocks. As they say, buy ’em when you can, not when you have to.

    I see lots of interesting set ups…nice double bottoms.

  23. Teddy commented on Aug 7

    Aren’t all the idiots who are whacking Barry today at the wrong blogsite? If not, then what the bleep are you all doing here? Bleepin masochists and sadists, what a sorry lot! Get real!

  24. advsys commented on Aug 7

    A theme that I have posted here several times.
    Focus on Fed rates is hiding the real issues. The economy has been kept racing along via Stimulus. Not by organic growth. When you run out of stimulus, then you run out of race track. Trying to find new stimulus does not solve anything. It just keeps things out of whack for a longer period of time.

    So, I have to strongly agree with BR. It is very clear that we are getting diminishing returns from increased stimulus. We will have to pay the price tag for stimulus at some point. As an aside the sooner the better IMHO.

    BR’s second point is truly a key point for anyone who wants to avoid losing a lot of money in the near future. You want to be pulling out or going short before the the majority of the market figures this out.

  25. babycondor commented on Aug 7

    “Maintaining a long bias” is an investment strategy that takes into account the cyclical nature of the economy and the markets. It is not rationalization. Take a look at the long term bias of each of the major indices (going back to 1950) and it’s clear that maintaining a long bias has been profitable.

    As with every generalization, it is good to define your terms. How long is long?

  26. S commented on Aug 7

    The way I see things, participants in the extremely deep, multi-trillion dollar treasury market have one purpose in life: get inflationary expectations right and price treasurys accordingly.

    Conundrum or not, by pushing rates below 5% aren’t they betting inflationary expectations are not an issue? And aren’t investors who have pushed bank stocks to 52 week highs saying they anticpate a steepening curve (from lower short rates)? And would homebuilders be continuing to rip higher if investors anticipated much higher interest rates?

    I think the FED will be easing sooner than most people (at least those who contribute to this blog) think, perhaps beginning as soon as October.

  27. aug commented on Aug 7

    I agree with you , no reason to be a critic

  28. HT commented on Aug 7

    For the record, I wrote my opinion before reading the Feldstein piece. Now that a Harvard academic is saying the same thing, I need to rethink my call!!

  29. larry commented on Aug 7

    One of my close relatives living in the US, San Jose should refinance $600K+. he has “4 years interest only” thingy which expires in 2 years from now (yes, i did tell him everything i knew and read about RE, nothing helped). The guy naturally has two cars (average engine is 3l, both are Japaneese), swimming pool, huge house, his wife does not work. “American dream comes true” story.

    If the Fed raises again it will cost to my relative another $100/month. i bet he prefers slightly higher inflation.

    US consumer is leveraged. Shorting of USD is a US national sport. I think the Fed will acknowledge this fact and screw the bond holders.

  30. whipsaw commented on Aug 7

    wow, what got these bullpups so nasty all of a sudden? A little anxiety perhaps?

    Barry isn’t exactly the only one who has been observing for 6+ months that once the Fed Pauses! or Halts!, it is just the official declaration that we have a problem with the economy. But that doesn’t necessarily mean that a Pause! or Halt! will fix anything because stagflation doesn’t work that way.

    The stark fact is that interest rate hikes are not stifling the economy and keeping the markets from reaching a Higher High!, they were required to keep selling US debt since we can’t pay it and have to roll it over monthly, mainly to the Asians. The economy is dropping because the housing bubble has burst and that was the only thing that picked things up after the dotcom bubble burst.

    Regardless of what the FED does, the economy is going into a bear cycle and the stock market will lead the way. The hopelessly hopeful who see double bottoms everywhere will get their chance at salvation once they run out of money and learn Investing Rule No. 3.

  31. Zephyr commented on Aug 7

    With the lags between policy and impact on the economy the surge in the first quarter reflects the long ago rate level. Inflation should lag the GDP by about 6 months, so expect an inflation surge soon.

    The recent rate increases are more than enough to cause the economy to slow. However with the lags we are still feeling much of the stimulus from the 3% and 4% fed funds rate levels, and have yet to get any significant effect from the last six rate increases.

    The fed has already gone further than needed to cool it all down – we just have to wait for a while for the overdose to kick in. 2007 will start poorly and deteriorate.

  32. Ceo commented on Aug 8

    The Fed stops when they think inflation/expectations are in hand ….. if they think the economy’s in trouble , they cut

  33. albiegf13 commented on Aug 8

    Perhaps this is one of those rare events that occur in the universe every trillion years…. It was just meant to be…

  34. Kaleberg commented on Aug 8

    Wow, it’s the 1970s all over again. High inflation, soft economy, pointless war, huge government deficits, a soft, value oriented stock market, and a Federal Reserve that is primarily concerned with political expedience. I suppose we are in better shape because workers have no leverage to keep from losing ground as prices rise, though I doubt that most Americans see it that way.

  35. jkw commented on Aug 8

    How can you think that workers having no leverage makes things better? Did you forget that most of GDP comes from consumer spending so that any slowdown in consumer spending hurts the economy? Or do you think that workers will just borrow money forever to keep buying things? Workers having no leverage means we are in worse shape.

    Real wages can’t be suppressed forever. The options are to raise wages or to lower prices. There has been a long period of deferring real wage increases. Most of the productivity gains of the past 25 years still have to go into wages before the economy will be healthy again.

    To put it another way, people aren’t going to accept having all the benefits of productivity growth go to a small segment of society. Would you rather have peaceful wage increases or a violent revolution? Feudalism is never going to be accepted again. If the upper class pushes on the middle class too hard, the middle class will demand socialism.

  36. Lee commented on Aug 8

    I totally agree with Feudalism never being accepted again – but they didn’t have ‘plasma TV’s combined with green stamps for food’. It is up to each person to educate themselves in order to fight the wealthy class- that takes time, effort and energy which not many are prepared to sacrifice in order to educate.

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