Fed’s Quarter Pointers Get Us To No Where

In “The Red Badge Of Courage,” Stephen Crane’s tersely written Civil War novel gets my money. The combatants fall like bundles. Don’t mix up Stephen Crane with Hart Crane, the dark poet who wrote about the “Brooklyn Bridge” which adumbrates in time and space. This was a shadowy image marking downtown New York’s East River. 

In my early days on the Street, late fifties, I’d walk from Wall Street, across the bridge to my cosy apartment in Brooklyn Heights aptly named Pierrepont Street. In this half hour stroll, I’d find plenty of time to mull over all my errors of commission and omission. I’d easily correct my errors of commission. Never wanted to be wrong for long. 

I was a scared, fully invested bull. Stories everywhere. It could be a new semiconductor from Transitron or Ford’s compact station wagon, the Falcon, still showing good 10-day selling rates. Everything was measured in 10 to 30-day selling rates. Managements at Fairchild Camera, Motorola and Xerox were favorites because they’d pick up the phone and talk to me. 

Sadly, there were regulators like FRB Chairmen who were costing me serious money when they’d raise the rates and make it more costly to do my business. The head of margin at my brokerage house was always after me to meet the house margin requirements, threatening to freeze my account for 30 days. I’d cry myself to sleep cursing McChesney Martin and sundry FRB chairmen who’d raise margin requirements say from 7.5% to 8%. In my salad years, early sixties, I never saw bargain interest rates. 

Today, we argue whether the Fed should step up by half points rather than quarter point us to death for at least a year. Curiously, I haven’t been able to retain Fed Chairman Powell’s name until now. He is pretty much faceless and nameless to me. 

All this reminds me of the International Monetary Fund chairman who years ago claimed that all rate changes made to control rates as a policy must had no impact. 

Let me come forth and say a succession of quarter pointers now would be meaningless as a policy initiative if not counter productive. At least Fed chairmen who faced sizable inflation raised rates by several percentage points to end a cycle of rapidly progressing inflation. 

My feel is current Fed policy of whimpering remains ineffective. For our business cycle to reaccelerate we need to see home mortgage rates decline by at least 100 basis points along with auto loan rates. In short, we need massive stimulus not pussy cat policy whimpering. 

I remain underinvested at 50% long, which is unusual for me. Normally, I’m a fully invested player using maximus leverage. I’ve been underinvested (50%) all year long. For my money,  the price-earnings ratio next 12 months is closer to 20 times my earnings projection.  My comfort zone is a mid-teens multiplier.

More than ever, I’m happy with holding equity paper yielding 6 to 7%, like Enterprise Products Partners and Energy Transfer. I just bought another  traunch of 10-year Treasuries yielding 4.53%. The spread between 2-year Treasuries and 10-year notes suggests money is preferring the long term yield 20 basis points greater than the 2-year Treasuries. The financial world as yet hasn’t settled in for a recession.  Tesla’s wings are yet to be clipped along with other glittery paper. The Fed’s quarter point hikes have no impact. We’ll just whimp along.  No zip from auto sales and home building starts coming. The high yield bond market finds me disinterested as yet. 

Consider! Everyone missed his call on the 1982 recession which was deep and ugly worldwide. Paul Volcker was running the show then. Thousands of economists saw this coming, but underestimated the staying power of Volcker and company. 

The International Monetary Fund in studying its basic economic forecasts over the years, found errors so great that they were useless for suggesting policy initiatives. Staff economists blamed a world rich in economic upheavals for missing GDP by 1% per annum. That’s a 33% miss on GDP that grows 3%, annually most of the time. I just doubled down my play in 10-year Treasuries as the curve widens over 2-year paper and draws no commentary. What I remember about Paul Volcker is that he lived in an  efficiency apartment and walked to work in the Capital. It wasn’t time for the Doge’s Palace as an office.