Here's why the Fed may have won already but is still acting like nothing has improved

Published Sun, Nov 20 20225:10 PM EST

What does the Federal Reserve really want? We have three hardcore regional central bank presidents talking Tuesday: Cleveland Fed's Loretta Mester at 11 a.m. ET, Kansas City Fed's Esther George at 2:15 p.m. ET, and St. Louis Fed's James Bullard at 2:35 p.m. ET. We can bet that they will be one-upping each other about how high they want to take fed funds, the overnight bank lending rate. It's a little bit strange after we got our first bit of good consumer price index (CPI) and producer price index (PPI) news to expect them to be as harsh as ever. They seem to want to ignore anything that's succeeded since the Fed's rate increase cycle began back in March. Housing Redfin , an on-the-ropes fintech for housing, reported this past week that a family must earn $107,381 to afford a $2,682 monthly housing payment, up 45% from two years ago due to soaring mortgage rates. That's with only a 5% wage increase this year. Yes, housing has gotten too expensive. But what does the Fed want? A rate that makes it so expensive that most people can't buy a house? Is that the goal? Is it to make it so that once you buy a house you don't have enough money to take care of it? Or is it to just force housing to come down in price no matter what, back to a traditional trendline pre-Covid pandemic? I think that could happen if 7% remains the operative mortgage. But if they take it to 8% you could argue that's really about it. If you listen to the three-headed monster you have to believe they want that. Homes are too high. Everyone agrees but you have to believe that it might be occurring right now, with the cancellations and the lack of traffic we are seeing. You are not going to see sales go up. Why not wait and see how much prices come down? They just won't do that. If you take short rates to 7% wouldn't mortgage rates go to 10%? I would think so. Autos Then there are autos. The big issues here have been the lack of new cars and the bid-up of used cars. We got the Manheim Index for the month on Friday and we now have a double-digit percentage decrease versus last year. Again though, it's compared to a big increase from pre-pandemic. The hawks on the Fed want vehicles back to pre-pandemic. That can't happen until there are more semiconductors to finish the cars and trucks that are lacking chips. Last week, though, General Motors CEO Mary Barra told me that the chip logjam is over. There will be plenty of new cars and trucks in the market. Ford (F), a Club holding, told me six weeks ago that it would be ready to ship maybe 50,000 new vehicles that had been knocked out by a lack of nameplates, caused by a contracted nameplate factory. Plus we know that Carvana needs cash coming in. It can be a big part of a decline in used cars, one that could cause everyone from Lithia to AutoNation to lower prices. So, again, like homes, the Fed is winning. But, again, does winning matter? Or does inflation have to be trounced? Wages How about wages: They seem to be rising ineluctably. This week though, I interviewed Tom Shannon, the CEO of Bowlero — an outfit with more than 300 bowling lanes — and he said that he was proud of his gross margin improvements including the fact that he has so many more applicants for openings than he had last year. I pressed and he said things had changed rather radically when it comes to the pool of labor. Make sense? The money the federal government gave us may have run out along with the benefits of the child tax credit. OK, I know, a nationwide bowling company is not necessarily a Verizon or an Amazon (AMZN), which we hold in the Club portfolio. It is, however, a bellwether for unskilled jobs. Layoffs Now I have been adamant that the real wage defenders will be tech companies, where I think the staffing is way out of line versus the advertising and shopping nature of so much of the internet. In the last few years, venture capital companies have gravitated toward one segment: enterprise software. There are whole firms that specialize in creating these companies because forever they were home runs. That's no longer the case. There are too many companies that analyze and store data and crunch data. We don't need them all. There are too many software-as-a-service (SaaS) verticals, and not enough new companies to need their help. This is a major, unnoticed change. What happens when these companies can't get new clients and can't come public? I would say that's when you get the big layoffs. Oh and let's not forget that Amazon hired an army of people to help facilitate its expansion during the pandemic. It would have been terrific if the pandemic demand lasted longer. But it hasn't. These people most likely will stay through the holidays. But then what? I think that, again, if the Fed were to wait through Christmas they would see the layoffs and the corporate failures. But they aren't waiting. They are taking no chances. I think it makes sense to wait. The inability to bring new companies to market has a very extended set of repercussions: bankers, lawyers, and auditors. Again, the Fed doesn't seem to care. It's almost as if they sense the jugular and they are going for it. Prices Sure there are other things that they can't control. The price of food has been intractable. There hasn't been much trade-down. The supermarkets seem to have no clout. It's a problem that a truce in the war between Ukraine and Russia would do more than any company can do given that between 35% and 40% of our fertilizer comes from there. I think that next year our harvest will be re-adjusted. Don't forget the reverberation that we should be getting from the decline in the cost of both paper and plastic, the latter really getting weak, should matter soon to consumer packaged goods companies. However, they tend to lock in their costs at the beginning of the year. That means we won't see the relief until the beginning of next year. What's changing right now? The cost of bringing goods to market. JB Hunt , such a good trucker, told a story where the driver shortage is winding down. Again, prices haven't fallen yet. Except at the spot level. But that means they are going in the right direction. How about oil? Back to where it was in September and still no sign that the nation's Strategic Petroleum Reserve (SPR) won't be tapped even as there's no sign of gasoline going higher. Again, a win but not enough for these Fed heads. Bottom line In fact, I think what's so frustrating is EVERYTHING is going in the Fed's favor and yet it would seem to the three Fed speakers that NOTHING is going their way. The good news? It's not hurting earnings yet. The strong dollar's been more punitive. The bad news? It's beleaguering to know the Fed has no plans to slow things. That makes it so stocks will be hostage to the 2-year Treasury yield , which is the Fed's barometer. A move to 5% cannot be overcome. That's only half of a percentage point higher than now. One thing that's for certain, the buyers of the 2-year may be more sensitive to the data than the Fed. That's what would cause a Santa Clause rally in the stock market. If we get one of the three Fed speakers this week — Mester, George, or Bullard — to recognize what I have just pointed out? The 2-year Treasury yield increase ends, and the games begin (Jim Cramer's Charitable Trust is long F and AMZN. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. 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The Marriner S. Eccles Federal Reserve building in Washington, D.C., US, on Wednesday, July 6, 2022. The Chinese government tried to obtain sensitive internal information and build a network of influence and informants inside the Federal Reserve, according to a new report released Tuesday by Republican staff members of the Senate Homeland Security and Governmental Affairs Committee.

Al Drago | Bloomber