Is the Medicine Killing the Patient?

Until that moment, I’d never been in a blizzard, and certainly never driven through one.

But there I was, my family and I, driving through southern Kansas on the way to an airport in Oklahoma after visiting my paternal grandmother. We had a flight to catch back to New Jersey in a few hours.

Spoiler alert: We missed the flight.

We did so because this was the age before the iPhone and turn-by-turn map apps that guide you in an upbeat Irish tone (my Siri is an Irish lass I’ve named Saoirse—sounds like sir-shuh). I was driving Old School—relying on a map I’d printed out on actual paper after telling Mapquest (who remembers Mapquest?) that I needed to get from Independence, Kansas, to Tulsa, Oklahoma.

Somewhere along Highway 75, the blizzard descended with malice. The interstate was closed. Must detour.

But I hadn’t plotted a detour, and there was no Saoirse to effortlessly navigate me back to where I needed to be.

And that is how my family and I got lost in a blizzard in either Kansas or Oklahoma—still not sure—and why we missed our flight home that day.

The moral of our intro: Those who cannot see where they’re going are destined to end up where don’t wish to be.

Which brings me to the Federal Reserve…

Despite the Fed’s self-stated aim to cut interest rates at least three times this year, we’ve yet to see the interest-rate weed-whacker make an entrance. Rates remain firmly perched at 5.5%, and various members of the Fed keep hinting at “higher for longer,” implying that interest rates might need to remain elevated to finish the task of bludgeoning inflation until that little bugger is back at 2% or below.

But here’s a question to consider:

What happens if higher-for-longer interest rates morph into lower-for-longer economic growth rates?

Will the battle for the soul of inflation have been worth the result?

Phrased a different way: Is the medicine killing the patient?

In recent weeks/months, we’ve seen various central banks (Canada, Switzerland, the EU, Argentina, Singapore) cut interest rates, as I noted in a dispatch earlier this week. They’ve done so because they’re responding to signs of economic anemia in their local economies.

There are signs of anemia in the US economy as well.

But the Fed will brook no facts that stain the economic narrative it’s pushing. That narrative is summed by Fed Vice Chair Phillip Johnson: “While we have seen considerable progress in lowering inflation, the job of sustainably restoring 2% inflation is not yet done.”

By focusing so intently and so narrowly on inflation, the Fed doesn’t see where it’s going with the economy and will end up in a place it doesn’t want to be—a contracting economy.

The Fed is ignoring indications that all is not well beneath the surface… an underlying weakness, largely unacknowledged, resulting from high interest rates. That’s very likely to lead us into a situation where economic growth is lower-for-longer.

But don’t take my words at face value.

Pay attention, instead, to the Fed itself.

This is from the Federal Reserve Bank of Minneapolis and a report it released in February titled, Businesses Continue to Struggle With High Prices and Interest Rates.

Per the Minneapolis Fed:       

High prices and elevated interest rates have continued to put pressure on businesses, according to a recent survey by the Federal Reserve Bank of Minneapolis.

The January survey received 602 responses from business owners across the Ninth District [the Minneapolis Fed’s stomping ground]. Companies reported both lower revenues and profits overall, and some noticed their customers reducing spending.

Amid heightened labor and operating costs, more businesses have also pulled back on hiring and a small but notable share have reduced staff levels.

The Fed does note, almost begrudgingly, that “…over half of businesses were still hiring in some capacity, and near-term outlook for businesses was more positive than negative overall.”

But then the report immediately picked up again with this:

Changes to revenue leaned negative for many businesses in the Ninth District. A higher share of firms experienced revenue declines than those that experienced growth over the year. Expectations for future revenue have tilted negative as well, with nearly 40 percent of respondents expecting declines and only 26 percent expecting revenue to increase.

Business owners were similarly downbeat about profits. About 47 percent reported that profits had declined compared with the same period last year, and profits fell for over half of respondents in the most recent quarter.

Respondents reported that heightened costs were taking a bite out of profits, and many were concerned about falling customer demand.

My interpretation: “This glass of apple juice will assuredly kill you. 90% of it is a highly pure strain of arsenic. But there’s 10% real juice in here, so that’s great—and no added sugar! But still, the arsenic is going to kill you for sure.”

What all of this means?

Well, I’ll tell you that I am eagerly putting together an upcoming issue of my Global Intelligence Letter for later in the summer, the working theme of which is that the Fed is going to cut interest rates because the underlying economy is clearly weakening. But we’re still going to have inflation. That’s a function of all the free money that has poured into the US and global economies over the last 15 years or so to save the world from economic and financial crises and the pandemic.

You can’t easily hoover up trillions of dollars and euro and yuan and whatnot once it’s flowing through the economy.

So, we will end up in a situation where the Fed has to concede and lower rates…

And in that environment—inflation amid falling interest rates—there are certain investment sectors that are quite likely to excel.

But more on that later…