Program: Cavuto Coast to Coast
Station: Fox Business News
NEIL CAVUTO: The administration is great, he said, is seriously considering the possibility of temporarily junking the federal tax on gasoline. It’s 18.3 cents a gallon diesel. It’s even more at 24.3 cents a gallon for diesel taxes here. What we don’t know is exactly how far such a tax holiday would go. We do know that in just the last three weeks, we’ve risen about $0.18 on the average price of a gallon of gas. So whatever tax you take off the market all of a sudden shows up in the underlying price. So damned if you do, damned if you don’t. So where is all of this going? And this day, the Federal Reserve is meeting to see what it can do to sort of curb this appetite for not only gasoline and oil, but pretty much everything that’s now taking grip in our economy. Scott Martin joins us. Ray Wong joins us. Gentlemen. I want to begin with you, Scott, because the administration’s approach to this is anything but for the time being, more domestic production. It’s going to try to urge the oil companies to do just that. But the oil companies come back and say, well, you’ve made it very, very difficult, because whatever reprieves you give us are very short lived and very limited. But the message seems to come from the White House. You guys are gouging Americans and it’s got to stop. What do you think.
SCOTT MARTIN: It does, Neil? And you know, you’re making the oil companies the enemy when in fact, there’s a solution. And oil companies and consumers are not stupid. They know this is government policy tried and true. This was the war that President Biden declared on the energy markets when he took office. And so this is just a follow through from that sentiment. And so instead of being, say, friendly to the oil companies and saying, how can I help? Biden comes out and says, you’re doing this wrong. Change your business or else. And that’s just not going to work. And the great point you made about the federal tax holiday, I mean, in Chicago alone, we’ve got state and local taxes, Neil, that are close to a dollar of gas prices that we see today. There’s all kinds of help that if the government wanted to come out with and give the American consumer just immediate relief, they could do this. But instead they kick this political football down the field and say, well, it’s the oil companies, it’s this, it’s that, it’s Putin, for crying out loud. And so they don’t want to address the real problem here. And until they get to the real solution, which is exactly government policy, we’re going to see prices go up even more.
CAVUTO: In the meantime. Ray Wang It’s really the Federal Reserve and only the Federal Reserve, whether you like the Fed, whether you hate the Fed. The fact of the matter is they’re the only ones right now with the ability to sort of directly deal with this head on. We don’t know exactly how they’re going to deal with it today, but it’s looking like at least a three quarters of a percent hike in the overnight bank lending rate called federal funds, which would bring us up to the round, the one and three quarter percent level with likely a lot more to go from there. What do you think?
RAY WANG: Yeah. I mean, part of it was really to get the demand destruction and we’re starting to see implications. Right. Auto sales are down 3.5%. The National Association of Homebuilders have pretty much said their indexes are continuing to go down in terms of confidence, in terms of production of homes. We’re seeing in retail sales that were up 0.1%. But when inflation is 8.6, you’re really behind eight and a half. So I think the market’s taking care of some of this. The question really is, where is the ceiling? And so if they hit 75 basis points today and then say we’re going to do another 50 in July, I think the market will breathe a sigh of relief and say, okay, good, we think that’s the top. But if they keep moving and move too far, I think there’s going to be pushing us into the edge of a recession. And the economy is in a frail point at this moment.
CAVUTO: You know, Scott, I was sort of factoring things out, you know, pen on a napkin here. If they got aggressive and stayed aggressive right through the end of the year. I know the consensus seems to be and I don’t know where you gentlemen are, Scott, talking to you now that we end the year with the Fed funds, probably around three and one half percent. But there’s another argument to be made. If the Fed really gets aggressive and hikes three quarters of a point at every remaining meeting, which would take you through today, the July meeting, the September meeting, the November meeting, and finally the December 13 and 14 meeting. I added all of those up and if it got 75 basis points with each meeting, I would assume unlikely we’d be up close to 5%. Are we going to go there?
MARTIN: We could. And I think, Neil, the key point, good math, by the way, there, I don’t think I even would have gotten that right and I don’t think the Fed would have either. And that’s a scary thing. I think the sooner they get hawkish and the sooner they get, let’s say, tight, Neal, the better off we’re going to be. I know that sounds crazy, but the market has been crying crazy for the last two weeks now in the ten year benchmark for the ten year rate. I mean, look at the rate. You’re right on the ten.
CAVUTO: You’re absolutely.
MARTIN: Right. Yeah. It’s telling the market. It’s telling the Fed, rather. Neal, I think you’ve got to go 100 basis points today. 75 is just the baseline. If they do 100, I got a prediction. The market rallies, the equities rally because they’re like, okay, the Fed is now taking a line in the sand. They’re putting the stake in the ground and saying, no more of this screwing around. We’re not going to do 50 basis points anymore. We’re going to get serious. And the sooner they do that, Neil, the sooner the recession comes and or is over and the sooner to my friend that they can actually start cutting if they need to, to get the market or get the economy back on its footing.
CAVUTO: That’s interesting. You know, Ray, it’s sort of like the rip the damn Band-Aid off approach. It’s going to hurt like heck, but better that than just to sort of slowly do it, which would still be painful. Just painful a little longer. If the Fed were to do something like that, forget about a full percentage point cut today. That could happen. I’ve heard that. But to to raise rates to the point that by the end of the year, we’re close to 5%. If you think about it, we have an inflation rate that’s well north of eight and a half percent. So they’d still be under that. And normally that’s what history says is you’re sort of guideline. Your benchmark, whatever the inflation rate is, is where your Fed funds rate should be. I just wonder, like if you get up to those kind of levels, aren’t all bets off.
WANG: All bets would be off. But most definitely this is just one side of the problem. I think your earlier point really around energy prices, which is driving the inflation piece that’s got to be addressed. This war on American energy is ridiculous. I mean, we need a transition to ESG, but it’s got to be a pragmatic transition that doesn’t bankrupt everyone in the process. If you want to drive down inflation right now, pump oil, drive down energy, open sources. It’s not just the leases. It’s about also making sure the regulations are available, the permitting is available, and the fact that the pipelines, the transit and all those other regulations are removed. But that just means people aren’t serious about driving down inflation if they’re not addressing the energy issue.
CAVUTO: I’m just wondering and very, very quickly, my produce is going to kill me. But you guys are so good. I did want to pick your brains on this. I know you’ll be back a little bit later in the show. Scott, if the Federal Reserve were to signal that an aggressive rate hike, a series of them, a minimum of 75 basis points were in the cards. You argue the administration, the markets would respond favorably and maybe start turning things around. There are many who said even at these levels, the markets are still rich, though. Do you think the markets remain toppy? Even with the 20% plus decline we’ve seen in the major averages?
MARTIN: Short term, they may be a little toppy just because of the valuations that you’re referring to, Neil, and the fact that earnings are going to come down in the next couple of quarters, because we do have that slowdown in consumer spending. But for even the shorter term, which is like two or three days, I think the market loves it. I think anything short of something hawkish or something serious from the Fed today, which is basically 50 basis points or less, to jump back to Edward Lawrence’s amazing reference point to Nancy Kerrigan earlier, that’s your Tonya Harding today, 50 basis points or less. It’s going to whack the market in the knees because the Fed is not serious about getting their handle around things if they go higher. I think that’s where the market actually bounces here because yes, valuations are high, but they’re short term, not to high enough to where the market can rally.
CAVUTO: Now, I left out just looking at the Nasdaq and technology stocks. All right. They’re off, many of them 50%. The average itself. Well well, north of 28%. So you could say that’s overkill. But others are saying it is still rich. Do you?
WANG: You know, I don’t as well. I think the floor and the Nasdaq’s going to hit around ten. I mean, if you’re looking at 15 X on P as kind of like the low point, that’s probably where we’re going to sit somewhere between 14 and 15. I think what we’re going to realize in the Nasdaq is the tech companies are still doing good. The earnings are amazing. You saw what happened with Oracle a few days back. The the real question is really where is the dollar going to be? And, of course, what’s going to happen in the B to C market in terms of consumer sentiment and if that’s going to slow folks down. But tech companies are still growing 20 to 30%, especially the big cap ones.
CAVUTO: Gentlemen, don’t wander too far. I want to pick those fine brains and take your quotes to be my quote. So they were my ideas. But thank you very much, guys.
Program: Cavuto Coast to Coast
Station: Fox Business News
NEIL CAVUTO: All right. You know, a little more than a week ago, the odds of anything as wacky as a 75 basis point hike in interest rates seemed so low. In fact, it represented about a 3% possibility in people who trade on this sort of stuff. The overwhelming majority betting on on a half point hike. That has completely flipped now, better than 90% betting. That is what we will see today. The overnight bank lending rate known as federal funds increased three quarters of a point. There’s a very small sector of that group insisting that it will be a full percentage point. I don’t know where our guests are on that, but let’s get right to it, because we’re minutes away from that Fed announcement. Michelle Schneider joins us. The Market Gauge Group managing director Ray Wang is back with us. Constellation Research CEO. Everybody wants to rule the world. Ray already is ruling the world, so we just thought he’d throw that into the title. Scott Martin of Kingsview Asset Management, the CEO, Fox News contributor, ruling the the world for young people who want to understand how this whole market stuff works. Welcome to all of you and thank you for joining us. We’re minutes away from a rate hike, Michelle, that we know, but will it be three quarters of a percent?
MICHELLE SCHNEIDER: My guess is that it probably will be a half a percent, but it really at this point doesn’t matter because there’s a few givens. A We are in a bear market. B Certain areas of inflation, we’re seeing cooling already, auto housing market. And C, is is that even if we do get some kind of a relief rally and some some kind of bigger hike in interest rates, we cannot cause certain types of inflation, which is the supply side and more side inflation, which basically affects food. That’s not going to be any.
CAVUTO: You see a half point hike. Right. I know it’s not crucial to you, but you see at least a half point, you’re not in the three quarter percent hike.
SCHNEIDER: I don’t think so now.
CAVUTO: Okay. Where are you on this, Scott?
SCOTT MARTIN: Three quarters and I’ll go. The tears for fears are out. Neil, one of my favorite bands of all time who I think is on tour again, by the way. So pick up tickets if you can. I’ll shout it out. I’ll shout it and tell them they need to do 75. And I disagree with Michele. I think this does matter. She’s right about the supply chain concerns. There’s supply and demand. Demand is cooling, but the market is in such a weird, frisky, emotional state. The market, especially the bond market, are old friend. The bond market that was so gentle, so peaceful and now freaking out needs to see the Fed take a stand. I mean, I’m so excited about this. I’m so wrapped up in this meeting. I combed my hair. I went into the studio because they need 75. The market’s told them 75. Anything less than that huge sell off.
CAVUTO: Wow. Okay. So if it is three quarters of a point and if the Federal Reserve were to follow up with such aggressive rate hikes, at least in the next two, possibly three meetings, now you’re talking, you know, a Fed funds rate that approaches 3% could be four and one half percent by the end of the year. What is an acceptable level?
RAY WANG: Building on the chairs for theosophy. Erskine That would be a mad world. And we’d probably see mortgage rates on 30 year side hitting seven and a half, which would take us probably to almost like 2000 to 2001. So, but, but it is likely, right? I think we do need the shock and I think it’s going to quell some of this. But, you know, it is definitely a supply issue. I mean, this is a supply side issue. And I think if we don’t solve that piece, we’re going to be in trouble. And I think that’s.
WANG: We’ll probably see those two rate hikes.
CAVUTO: Okay. I apologize for jumping on you, my friend. Michelle, is this a rich market to you right now? With all the drubbing it’s taken, you could still make the argument it is still rich. It’s still trading at multiples that are north of where they normally should be. And that’s after the selloff we’ve had. Where are you on this?
SCHNEIDER: Well, yes, we have valuations and PE ratios that were historical highs and a lot of the companies that bought back their own stocks through the years and enjoyed zero interest rates and low taxes are going to suffer as a result. And we don’t really know what fair valuation is, but I just want to explain that the supply side inflation, that rage is talked about, it doesn’t really matter at this point what the Fed does about the interest rates. You can’t control things that cannot be produced like food, like energy at this point. And so it doesn’t matter whether they go 75 or 50. And I just want to explain that we are in a bear market. The inflation is going to continue, particularly where it hurts the most. And yes, valuations are definitely still bloated and we don’t really know what fair value is. Maybe that’s the most exciting thing about this. At some point we will be able to establish what actual fair value is if you’re a believer and free market ultimately.
CAVUTO: You know, you can talk about it not having an impact on food prices, but you could argue just the opposite as well. It’s got I mean, you could start saying that people heretofore were buying expensive cuts of meat or whatever or are pivoting to cheaper cuts or or, God forbid, going vegetarian. That’s a whole separate issue. But the people will, in the face of those higher costs, start making these tough decisions. Therein lies the fear of stagflation, that the higher prices beget a slowing economy. Where are you on this?
MARTIN: I agree. I mean, going plant based. Yeah. And driving less. Flying less. I mean, I think Michelle’s right. I mean, it is a supply issue, but the demand side is totally part and parcel of that, too. So, Neil, I think the higher rates curtail the demand and the market though, this is going to sound totally crazy and overkill warning here. The market is going to be head over heels. Another one of my favorite Tears for fear songs. If the Fed gets a hold on inflation, they’ve played this too light. They have played this way too easy. And now they got way behind the curve. And the market is begging them to do something stark here. And so if they do that, the market’s going to start to rebound, I believe, because the inflation is the number one concern right now, both on the supply side, as Michelle pointed out, but also on the demand side. And the demand side will be curtailed if the Fed starts to be hawkish here.
CAVUTO: You know, I think something has changed here and I defer to you. You’re all experts. But as you know, I qualify as one because I read a prompter, so enough said. But having said that, that this is Jerome Powell’s Paul Volcker moment, I think he now aspires to be that blunt, that rough, that tough, and the
cautious Jerome Powell might might not be around any longer. And I don’t know how that plays out. But if if he is Paul Volcker, then we are in for some aggressive rate hiking, aren’t we?
WANG: We are, and we do need a Paul Volcker here, but we also need a Ronald Reagan to come back in and cut regulation. And we need to be able to open up markets and drive down food prices and make sure that we’re safe and secure and we feel well about that. And also open up energy, right? If we were to do some of that, I think we could cover both ends. It’s not an either or. The Fed is just one aspect of it. But there’s regulatory issues, there’s policy implications that are not being put to the test. And if we go back to some of those policies that would actually drive down cost and be deflationary, we’d probably be in much better shape than just relying on the Fed on this.
CAVUTO: All right, guys, I wish we had more time. We don’t. We’re very close. 30 seconds away. To Lauren Simonetti taking over in the next hour.
Paul Nolte, Senior VP at Kingsview Wealth Management, joined Bob Sirott to talk about the Fed’s plans to raise rates, why the housing market is slowing down, and the benefits of short term gains. He also discussed why cryptocurrencies are more risky than other investments and retail sales numbers.
Program: Your World with Neil Cavuto
Station: Fox News Channel
NEIL CAVUTO: By the way, we told you about how this really stung stocks today. The Dow down 880 points. This was its 10th down week and the last 11 you know that story here. But the betting seems to be that the Federal Reserve, the only game in town to fight this inflation, since we’re not seeing anything done on Capitol Hill to deal with it, it means that we’re going to look at a lot higher prices when it comes to our borrowing costs. For example, the Federal Reserve meets next week. The betting is they’re going to hike rates by a half a percentage point. They may the month after that, another half point hike. The betting seems to be in September when they meet after that, another half point hike, some factoring in maybe a three quarters of a percentage point hike. So rates go higher, prices go higher, everything seems to go higher. To Scott Martin on what the implications could be. He’s with Kingsview Asset Management and Frances Newton. Stacy of Optimal Capital, the director of strategy there. Frances ended with you begin with you the notion that the Fed has no choice now but to up the ante when it comes to upping those rates. Do you agree?
FRANCES NEWTON: I do. I think in the interim, they have no choice. I think that the persistence and energy is giving them quite a challenge. But the problem is, is that we have a record amount of debt in the system and last time they hiked rates, they had to quit. They they didn’t quit because they wanted to quit. They had to quit. There was a liquidity shortage in the system and they couldn’t service that debt. And inflation is horrible as it is. It’s better than a credit crisis. And so I think that they’re going to be as aggressive as they possibly can be until they have to stop.
CAVUTO: You know what’s interesting about that? You talk about our $31 trillion debt, Scott. Just a nominal uptick in rates to where we think we’ll be by the end of the year to three and one half to 4% on the overnight bank lending rate, which is the rate they control. That’s going to add trillions to that.
SCOTT MARTIN: Yeah, it’s going to feel really tough. And actually, it’s ironic, Neal, maybe the government, the actual debtor there, will feel the pain that the consumers are feeling for the last several months. Oh, my goodness. And share some of that feeling around because goodness, this is a lot of trash talk. It feels like from the administration this week, I mean, pointing fingers, blaming oil producers, blaming Vladimir Putin, who’s been pretty quiet of late, certainly. I mean, all this finger pointing, all the efforts that the administration says they’re making, Neil, are just really not happening because fixing this inflation problem, opening up some of the oil fields, getting nice, lets say are nicer, playing with some of the oil producers out there, helping out consumers. I mean, fixing this problem should be as easy as walking up the steps to Air Force One. But it’s not because they can’t do it. They can’t change their tone and they’re going all the way down the road with it. Even the energy sector secretary, as Jeff Flock pointed out, you.
CAVUTO: Know, Francis, what’s a little weird here? You know, a combination and a confluence of events, right? I mean, we have the retail inflation now back to where we were 40 years ago, consumer sentiment and other. It’s how people feel about the future is also at or around a 40 year low. The cost of living increase that is planned for Social Security recipients is probably going to be around 8.6%, the highest end stop, if you’ve heard this before, about 40 years. Meat prices, the highest in about 41 years. Gas the highest in about 40 years. What’s going on with this 40 year thing? And is someone trying to tell us something that that we’re in for something big just like we were then?
NEWTON: Well, I think we’re going to see this show up in the polls in the midterms. And it’s really interesting that, you know, Jay Powell has kind of switched his religion to Paul Volcker ism. So that’s giving us an indication of how he’s going to try to solve this problem. And how much was your first mortgage? 13%. Neal, I think if I remember correctly. Right. The interest rate on your mortgage.
CAVUTO: Did I ever mention that story to you? Yeah. Well, that’s what our.
CAVUTO: That was a bargain buy back then, by the way.
NEWTON: That was a bargain. But the really sad thing here, and I think this is what’s going to get people motivated politically, is the people who have assets, of course, therefore in one case are suffering, but it’s the people who don’t have assets that not only are putting up with a on average 12% increase on their food, they’re putting it on credit cards. And now that we’re raising rates aggressively, the interest rates on their credit cards are going to go up. So they’re going to end up paying a 20 to 30% premium on their everyday items. And that’s the saddest part of this entire process.
CAVUTO: And Scott Martin it’s what you’re used to, right? Your perspective, your life experience. Some people have never seen anything like this. How are they going to judge?
MARTIN: They haven’t. It’s going to be really rough. You know, we’re already starting to see that. I mean, look at savings rates plummeting. Look at credit card usage. That’s increasing, obviously, at a crazy rate. Now, the fact that consumers are tapped, I mean, they’re spending, but they’re spending on essentials. So not spending on discretionary items. And your comment about the 40 years, my friend, I mean, we’re seeing prices as high as they’ve been since I was prom king. If that doesn’t tell you anything to be scared about over the weekend.
CAVUTO: You were a king. Wow. I was lucky to get it at all. But after 13.
NEWTON: Years in a bassinet.
CAVUTO: See? Listen to you. I don’t know. It brings back memories. Not not so far, not all good memories. Guys, I want to thank you very much.
Paul Nolte, Senior VP at Kingsview Wealth Management, joined Bob Sirott to discuss when we could see a recession hit the economy, how long inflation rates could go, how high are interest rates going to get, and more.
Kingsview CIO Scott Martin discusses inflation, the labor market, and mortgages.
Program: Cavuto Coast to Coast
Station: Fox Business News
NEIL CAVUTO: Let’s go to Scott Martin and Jonathan Hoenig back with us right now. Scott, you know, we know that we’re anticipating strong inflation numbers, very high inflation numbers. And the fact is that even though Americans wages have been moving up pretty smartly throughout all of this, they’re still behind the eight ball here because they’re paying out more for everything from food to gas. How long do you think that remains, that that gap remains.
SCOTT MARTIN: Probably for the full cycle, Neal, until inflation starts heading back downward. Just because, to your point, they are so far behind. I mean, it’s going to be almost impossible to catch up given the structure of the labor market and the fact that, frankly, a lot of folks still amazingly don’t want to go back to work. So when I look at the financials and like Jackie talked about, that’s a great lead off, I think, for for the earnings reports that we’re going to see starting in Q2 here. But the financials are not performing well at all. I mean, you look at various stocks in that arena, Neal, whether it’s JPMorgan, Morgan, Citigroup, Wells Fargo looks a little bit better. Most of the banks look like, in a word, dog food on the charts. So something is going on there. And for us, we’ve been liquidating financials against the recommendations of a lot of other analysts out there this year, especially towards the end of last year. And getting more into real estate like XLRE instead. I think that’s a better way to play the lending environment than directly through the banks.
CAVUTO: You know, I think this is one of those quarters, Jonathan, where it isn’t so much the earnings that are going to get people’s attention, but the guidance and particularly with banks, what do you think they’re going to say?
JONATHAN HOENIG: Yeah, absolutely, Neal. I mean, as you know, the markets are forward looking, you know, and if Scott is exactly right, this inflationary cycle is just at the beginning. I mean, if history is any guide, this could be a five, six, even eight or nine year, ten year cycle of which the banks probably won’t benefit too much. Scott is exactly right. I mean, banks should be
doing very well right now because interest rates are going up. So what’s called their net interest margin is growing. As Jackie said, they’re basically making more money on that loan, those loans, but they’re underperforming. And I just think back, Neil, my biggest fear is credit quality. These banks have owned and issued a lot of junk bonds. 20 years ago, junk bond yields were about 18%. Even now, today, they’re only about 4%. So that’s my fear, is that the junk could get a lot junk here if the economy declines and even banks will get hit in that environment.
CAVUTO: You know, we’ve been waiting, Scott, if you think about it, for the stag part of stagflation to kick in. It hasn’t happened yet. And all of us have talked about this in the past. But I’m fascinated by that because I think a lot of people who try to draw the seventies parallel have yet to realize that that part of it, the economy just, you know, rolling over and dying. And that has not happened. Now, of course, it stays like this. And rates and overall inflationary statistics stay like this. It could be just a matter of time. But but do you think that avoids Scott, a repeat of the seventies for the time being potentially.
MARTIN: I mean, goodness, you know, the stagflation era of the seventies, Neal, like you said, is far away. I mean, we ain’t seen nothing yet with regards to what we saw a few decades ago and hopefully won’t the stag part of things, I mean, that’s kind of the story of my life as a personal note. So I get that part. But with regards to the banks going forward, what’s interesting though, Neil, about how Jonathan mentioned credit quality, I mean, I got a mortgage just recently, did some refinancing on some properties. My goodness. That was worse than an exam from the doctor that you don’t want to see if you know who I’m talking about with respect to how much they were looking into me and seeing what was going on, which gives me a little bit of patience and respect to what they’re doing because I think unlike 0′ seven and 0″ eight, there’s some more care that banks are taking and maybe they’re lending and expanding of their balance sheet so that maybe when we do pull out of this, when banks finally do get it together, the economy does grow again because there’s money out there for them to lend. They’re just being very stringent about who they want to give it to. That could refire the economy if things get lined up correctly.
CAVUTO: First, a reminder, Scott, it’s a family show. And secondly,
MARTIN: I thought this was.
CAVUTO: I assume you were talking about the dentist. Let me ask you. Of course. Of course, Jonathan. You know, young investors in particular were drawn into this market and the second wave of it, the bull wave. And and I hasten to add that a lot of them took their time coming, maybe burnt by what their parents went through in the financial meltdown, what have you. And I’m wondering, you know, if you’re twice burnt, are you are you really shy on that third go round? What do you think?
HOENIG: Well, you know, Neal, there’s an old saying, you know, you always want to avoid the herd. So find out what the herd is doing and then try to do something else and even go back to the late 1990s. You know, most people didn’t invest in stocks until January of 2000. That’s when most money came into the financial markets. Right and right when prices were at the top. So, you know, we’ve seen more money coming to the market in just the last few years in a lot of it. And not to denigrate them from from the Robinhood investor, younger investors who haven’t seen the type of interest rate increases. Commodity price inflation or bear markets. Those of us who’ve traded and been around a little bit more have seen. So markets can decline. They can decline quite precipitously. Even good names and good stocks, whether it be Apple, Tesla or all the rest. Sometimes good companies and good stocks aren’t the same thing. I think now it’s why now is a good time for caution.
CAVUTO: Okay, guys, I feel really old when you, of course, now support yourself as a like a Yoda of finance, Jonathan. But I guess that’s, you know, you’re doing enough. You know, you just feel that way. Guys, thank you both very, very much.
Kingsview SVP Paul Nolte takes a deeper dive into retail sales, oil, automobiles, inflation, and the raising of interest rates that will invert the yield curve.
Kingsview SVP Paul Nolte takes a deeper dive into oil, automobiles, retail sales slowing, inflation, and the raising of interest rates that will invert the yield curve.
Download the PDF here.
March 14, 2022
“The Bitch Is Back” was a top song in 1974 by Elton John. Why bring it back now? That bitch could be inflation, that is back and has politicians grabbing for the “WIN” (Whip Inflation Now) buttons. Buttons that President Ford used to acknowledge the high rates of inflation. Today the administration is pointing toward Russia as the cause of the inflationary problems that are staring everyone in the face. The seeds for inflation today were planted a couple of years ago, by cutting rates to zero and flooding the financial market and economy with money. Core inflation rates were at multi-decade highs beginning in April of ’21 and have been rising ever since. Russia has only exacerbated an already rough situation that the Fed is finally beginning to acknowledge. Their meeting this week will finally start the process of “normalizing” interest rates. Given the current rate of inflation, that level could be much higher than many are expecting. Complicating the situation, the economy is already showing signs of slowing. Additionally the Fed has never hiked rates with a yield curve this flat since the bad old days of Paul Volker, when he slayed inflation with rates well north of 10%. Yep, the bitch is back, and it will be difficult to get rid of this time.
Much of the economic data took a back seat to the news from Ukraine and the geopolitical news surrounding the war. Consumer prices came in just shy of 8% and may go higher still as the impact from higher commodity prices works its way into the economy. Not surprisingly, consumer sentiment fell last month as prices began to spike. Slowly there is a shift in psychology from “when will I get this delivered” to “how much am I going to pay for it”? Within the inflation data too has been a slight shift toward the services and away from goods. Used car prices dipped ever so slightly, while airfare and live entertainment are showing signs of rising as mandates are being generally lifted. Wednesday will be a big day, as the Fed will announce a hike in rates and the news conference following by Chair Powell will likely set expectations for future increases. Along-side the economic news and Fed announcement will be the ongoing war in Ukraine. For as long as that continues, commodity prices will likely continue to rise, albeit at a bit slower pace than the parabolic rise of the past month.
The bond index has fallen nearly 5% so far this year as interest rates rise. Even last week, as stocks fell, bond prices also fell. Is there safety anymore in bonds? Are they still an alternative to stocks? Yes, and yes are the short answers. Individual bonds have a certain maturity when face value will get paid out, so in those cases, the losses are temporary. For bond mutual funds and ETFs that do not have maturities, their losses continue to pale compared to stocks. Short-term bonds and those that are “inflation protected” have done well in this environment. The rougher part of the market has been those tied to corporate and high yield bonds which act more like stocks than bonds. Bonds are still a good stock market offset, if not always providing positive returns.
The themes of this year continue to play out. Technology related issues have struggled as investors shift toward more “value” parts of the market. Surprisingly too, small US stocks have performed well, likely due to their being sheltered from international trade issues. Companies that are providing improving cash flows, dividends and are valued near their long-term valuation ranges are also doing well. Of course, basic materials and commodities continue to rise at a crazy pace, as the energy sector within the SP500 has already jumped 35+% this year. Given the significant rise in a short time, it may be a good opportunity to begin taking some of those gains off the table. By selling some of the winning positions, it will provide some cash to take advantage of other parts of the market that have been beaten down to the point of providing good long-term value. Unfortunately, the geopolitical news will continue to dominate sentiment on Wall Street for the foreseeable future.
There are still some good hiding places to be invested while the storms of war and higher interest rates blow over. Some extra cash is not a bad thing, however selling everything and waiting until a “better time” may keep investors from recognizing the beginning of the next inevitable leg higher for stocks.
The opinions expressed in the Investment Newsletter are those of the author and are based upon information that is believed to be accurate and reliable but are opinions and do not constitute a guarantee of present or future financial market conditions.
Kingsview CIO Scott Martin discusses inflation, a slowing economy, oil prices, and the increases in commodities.
Station: Fox Business News
DAVID ASMAN: So conflict with Russia. Gas lines down the block and grocery prices soaring beyond control, if you’re feeling like you’re in a time warp, you’re not alone. We’ve been here before. An annual inflation jumped to seven point nine percent in February. This is the highest rate since 1982. Today, former Trump economic adviser Kevin Hassett warned of the dire state of the U.S. economy. Watch
KEVIN HASSETT: What we’re doing is we’re looking at inflation that’s out of control at a time when the economy is sort of headed towards a recession and the Fed hasn’t even started tightening yet, and we’ve got this runaway inflation and a weakening economy.
ASMAN: So here with me now in the studio is Fox News contributor and Kingsview Wealth Management, Chief Investment Officer. He’s from Chicago, but he flew to New York just for the show. Thank you for that.
SCOTT MARTIN: My own accord and not even having a little bit of skin here today.
ASMAN: Nice to see you in person, in person. All right. Let’s pick up off of what Hassett was saying. The problem is to deal with this inflation. The Fed is going to have to tight raise interest rates, but it’s reluctant, more reluctant now to do it than it was before the Russian invasion. And if it’s tightening at all during a slowdown, we got recession, don’t we?
MARTIN: They had their chance, David, when the economy was actually growing kind of on its own. And you’re right now it’s slowing on its own. I think we’re going to see one or two rate hikes and that’s going to be it. And by then, to your point, I mean, mix in the oil price issue and we’re not even at summer driving season yet. Just getting into spring break here, as I know, as my kids remind me every day that that’s like a month away. So imagine that with the oil prices mixed in to the Fed hiking interest rates. Recessions on the doorstep.
ASMAN: If you’re not careful, the bottom line the only way to stop the inflation and kind of inflation that we’re clearly heading towards. Kevin Hassett, by the way, thinks it’s already double digit because you look at the wholesale prices, that’s 10 percent down by now and that’s going to be heading towards the retail sector soon. And that means that consumers are going to be paying the price. But you have to do what Volcker did in the 1980s, the last time we had inflation like this that has put interest rates above inflation. We have it the other way around. We’ve got a long way to go. We’d have to have a 10 year rate of about 10 or 12 percent in order to start kicking down inflation. And it’s now about under two
MARTIN: Yeah it’s under two, David. And it doesn’t seem like it wants to rise that much, either. I mean, it got back up there like 220 or so and then fell again. It’s concerning, and it’s concerning how far behind the curve the Fed is, but also how, you know, inflation has kind of a bad rap, but inflation isn’t bad if you’re growing as an economy. And I think the Biden administration and local officials screwed up by saying, Hey, we know what’s best for the economy. We know we know what to do coming out of COVID, and they got in the way. And what happened was David is all they did was just the inflation picture. All they did was cut American jobs, or at least the people that we’re working. We have jobs. People just don’t want to take them because they’re getting paid to stay home. And so therefore the economy has been messed with by the politics that were involved. And so therefore this economy is not even breathing on its own. So it can’t even take care of the inflation that it would normally take care of.
ASMAN: And even though inflation was growing great guns before the Russian invasion was even on the radar screen. We now have President Biden blaming Russia for all of this inflation that we’ve had. Steve Rattner, by the way, who was an Obama economic adviser, Steve Rattner said today, that’s not true. These are February numbers and only include small Russia. In fact, this is Biden’s inflation, and he needs to own it. This is an Obama economic adviser, so nobody’s going to believe Biden in blaming Russia, are they?
MARTIN: No, I hope not. But they’re finding excuses as they have been this whole administration.
ASMAN: It was a supply chain problem. Now it’s Russia, who knows?
MARTIN: Not to mention the war on oil that he’s set to stage the day he got into office. So the other problem, too, is that really still bothers me is that little anecdote he told the American people about. When I think it was Joe Biden’s cousin or friend, Marianne came over and told him how expensive a pound of ground beef was. Well, that was over five dollars. We need Marianne to go over there again and tell him how expensive everything else is because it seems like he doesn’t even know.
ASMAN: By the way, you’re in Chicago, you know a lot about commodities. They’re going sky high as well, right?
MARTIN: They are. Commodities were limited up a couple of days ago. They’re going up on days when you’d expect them actually to drop and pull back so they keep rising. Chicago Another place that just got destroyed by political environment as far as just interference cut down the economy and it really messed up with
ASMAN: Fertilizer disappearing on world markets because they can’t get the food. Yeah, well, they can’t get the natural gas that they need to make. The fertilizer trade happens to food prices. Unbelievable. Scott Martin, good to see you. Safe travels.