Federal Reserve Chairman Powell did a masterful job yesterday of moving very slightly to a more hawkish stance about their bond buying (QE) program yesterday. Actually, we should use the term, “less dovish” rather than “more hawkish”…because his comments were not very hawkish at all, but he WAS able to move the narrative a bit closer to a discussion on when the Fed will “taper.”

One of the truly great rock bands, The Who, wrote MANY great songs over the years, but one of our favorites comes from the album, “Tommy.” (It later became a movie and is also known as a “Rock Opera.”) The song we’re talking about is “Pinball Wizard”…and it’s a classic. (In fact, even Elton John covered the song for the movie in the 1970s.) The reason we’re highlighting this fabulous rock song this morning is because Chairman Powell and the FED have been playing pinball all year…with the Chairman in control of the flippers….and there’s no question in our minds that he has become a “pinball wizard!”

The Fed “released the pinball” back in January…when Atlanta Fed President Bostic first breached the topic of tapering back on the Fed’s QE program at the very beginning of the year. In the following weeks, the ball bounced around on the bumpers…as several other FOMC members said that the Fed was still very dovish…while one or two others agreed with Mr. Bostic’s more hawkish stance. Each time the ball looked like it was going to fall into the “drain,” Chairman Powell came out with an ultra-dovish comment that acted like “flippers”…and sent the ball back into the game in a significant way.

As we went through the spring and into the summer, a few more FOMC members moved to the hawkish side of the ledger (with St. Louis Fed President Bullard being the most notable person to “switch”). It’s like they sent a second ball into the pinball game. However, Mr. Powell was still able to deftly use the flippers to keep both balls far from the drain…..Yesterday, however, Mr. Powell sent one of the balls back up into the game with a little less force than he has in the past. Don’t get us wrong, it was certainly not a whiff, so the ball still moved well away from the drain. It merely didn’t move quite as far away as it has at other times this year.

One of the key questions now is whether Mr. Powell’s forearms or hands will get tired too quickly. If that happens, he won’t be able to use the flippers as skillfully as he has in the past. If his forearms or hands do become tired, the balls could fall into the drain very quickly. In other words, if he uses the flippers too many times…and his arms/hands become tired…his ability to use the flippers effectively could become hindered in a significant way. (Investors might get tired of his very gradual jawboning strategy…and take matters into their own hands.)

Of course, sometimes the ball rolls perfectly between the flippers and even the most skilled player can do nothing about it. Therefore, we have to consider the possibility that Mr. Powell won’t be able to keep the game going in a way that will allow them to move towards their eventual (and inevitable) taper program in the extremely gradual fashion that he has so far. The markets themselves could cause the ball to fall between the bumpers despite his best efforts. Instead of becoming tired of Mr. Powell’s narrative (as we speculated above), the markets could become so overheated that some other catalyst could cause a “tantrum” no matter what the Fed is doing with their liquidity (or their jawboning about their future plans)………Having said all this, the Chairman seems to have the situation well in control right now.

The second question is whether an incredibly gradual move towards “taper” is the correct strategy for the Federal Reserve to be following. If they take too long to taper, they risk creating a situation where inflation becomes a substantial problem. More importantly, they also risk the chances that they’re create a 1999/2000-style bubble. (Since there are MASSIVE/RECORD levels of debt in the world…and there are MASSIVE/RECORD levels of leverage in the system…any new bubble will likely become one that will be all but impossible to recover from once it bursts.)

Unless the Fed knows something that the rest of us don’t know, why in the world would they need to continue to provide emergency levels of stimulus??? Unless they’ve been told that the virus will raise its head again in a very ugly manner (which the Chairman indicted he doesn’t expect to happen)…or that the situation in China is about to explode in a major way…or that we’re about to be invaded by aliens…why would the Fed need to continue to provide the same kind of stimulus that was needed to save us from an economy that had shut down and a bond market that had frozen up???

We understand that the Fed would feel the need to continue to provide SOME stimulus going forward due to several concerns, but why do we need to continue to get EMERGENCY levels of stimulus???? The Chairman himself said we have a “very strong labor market.” (No, the employment picture is not back to the level he’d like, but it is still “very strong.”) He also said that he didn’t think the Delta variant would cause major problems. He said that each of the waves we’ve seen since the original one has been milder than the previous one. He also said that we’ve “learned to live with it” and “we’ve learned to handle it.” Therefore, it won’t have the same kind of negative impact on the economy the initial virus did (his words.)….. In other words, he was telling us that he does not think that the variants will create another major emergency for the economy!

Well, if the labor market is “very strong”…and the economy will not face another Covid-related emergency…then why the hell do we still need an emergency level of stimulus????????? Why don’t they just tell us that they’re going to start tapering back on the massive levels of stimulus they are providing…but also say that the huge level of stimulus that they’ll STILL be providing will be enough to take care of any likely problems that arise in the coming months? (They could also say that they’ll quickly reopen the spigots back to their emergency levels if the situation suddenly reaches emergency levels once again.)

We’re sorry, but the Fed’s strategy does not make any sense to us. The only way it would makes sense to keep the current emergency levels of stimulus is if they know that the odds are high that we’ll find ourselves in another emergency situation soon. Otherwise, they raise the risk (significantly) that we’ll get either runaway inflation or a massive bubble (or both).

Again, maybe the Fed is doing exactly the right thing. Maybe there is indeed another emergency on our horizon, so it will be great that they already have a plan up and running to help deal with it. However, as we learned during the financial crisis, emergency levels of stimulus work best once the markets become washed out. Therefore, if we do indeed see another emergency, it is unlikely that the Fed’s largess will be enough to prevent a deep correction in our opinion. It will just keep the stock market from falling 35% (like it did last year) or 50%+ (like it did in 2000 and 2008).

Matthew J. Maley

Chief Market Strategist

Miller Tabak + Co., LLC

Founder, The Maley Report

TheMaleyReport.com

275 Grove St. Suite 2-400

Newton, MA 02466

617-663-5381

mmaley@millertabak.com

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