Is Deflation A Threat Right Now?

Posted: Jul 19, 2019 9:41 AM
Is Deflation A Threat Right Now?

Source: AP Photo/Carolyn Kaster

Curtis James Jackson III, also known in the rap game as 50 Cent, was born in South Jamaica, Queens, NY. He got his first taste of money selling crack at the age of twelve. Since then, he has branched out into other businesses, including an early investment in Vitamin Water that made him a centi-millionaire. 

His biggest hits include “Candy Shop,” “I Get Money,” and "Straight To The Bank."

By the time the market closed yesterday, Wall Street was singing the praises of the Candy Shop as two Federal Reserve officials made it clear that not only are interest rate cuts coming, but they also might go with 50 basis points (BPS). It’s a dramatic reversal on where Wall Street saw the monetary policy a few months ago when conventional wisdom figured action on rates would be on hold for 2019. And, that was a big change from coming into the year, where there was a sense the Fed would hike rates twice. What a difference a day makes. Now, the Street sees a 69% probability of a rate cut later this month, up from 34.3% on Wednesday and 19.9% a week ago.

Currently, Fed funds are 225 -250 basis points.

Singing a Different Tune

I have been screaming for the longest that the Powell Fed isn’t going to act after seeing flashing signs of a recession. They are going to be preemptive, in part because they are seeing flashing signs of a deflationary spiral that could get out of control very soon.

New York Fed President John C. Williams said inflation is running too far below the Fed’s target and that is the threat to the economy.

"If inflation gets stuck too low — below the 2% goal — people may start to expect it to stay that way, creating a feedback loop, pushing inflation further down over the longer term.”

He went on to say what I have been saying and writing for weeks.  There comes a point where people expect prices to fall; they wait before making a purchase, which recuses a demand for goods and services, which in turn slows the economy and makes people hesitant to make purchases. 

Golly, I have been saying this for so long, but it's all been telegraphed for months.

Shoot Your Best Shot

Curtis Jackson has been shot nine times, which gave him amazing street cred to go with a natural rapping talent.  His biggest album was titled: “Get Rich or Die Tryin'.”  In other words, shoot your best shot. 

This is exactly the message Williams has for all the monetary mavens saying the Fed should save its bullets.  His retort to that logic: “When you only have so much stimulus at your disposal, it pays to act quickly to lower rates at the first sign of economic distress.”

Fed Reserve Vice Chairman Richard Clarida told my friend and colleague at Fox Business, Liz Claman, "You don’t need to wait until things get so bad to have a dramatic series of rate cuts.”

Portfolio Approach


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Earnings Scoreboard

Yesterday, the session started shakily as investors couldn’t make up their minds on what were good results and what were poor results.  In the end, as stocks turned higher, investors decided to chase and get in on the good times:.

  • Union Pacific (UNP) +5.9%
  • Taiwan Semiconductor (TSM) +3.8%
  • Phillip Morris Int'l +8.2%
  • International Business Machines (IBM) +4.6%
  • Morgan Stanley (MS) +1.5%
  • Honeywell (HON) +3.1%
  • Williams-Sonoma (WNS) +7.4%
  • Chart Industries (GTLS) +6.1%

After the close, Microsoft (MSFT), Crowd Strike (CRWD), and Sketchers (SKX) popped after releasing their results. Also, Boeing (BA) soared (I know that’s lame) after saying it would take a $4.9 billion hit associated with the cost of grounded 737 Max jets.  Investors were bracing for a larger number.  Moreover, the production of 42 planes a month is expected to increase to 57 per month in 2020.

Today's Session

Stocks opened higher as investors cheered the latest earnings reports. Oil price and the energy sector rose after the U.S. said it downed an Iranian drone. 

On the economics front, Consumer sentiment edges up to 98.4 in July, a little lower than expected at 98.8, but higher than the prior month's 98.2