The FOMC decided to raise rates another 25bp to a high mark range of 2.25%. We applaud the continued move; however, we feel that we could be doing more and doing it faster. Holding interest rates or real rates still negative, some 10 years after the 2008 crisis is deeply concerning. All too often people focus on the Fed Funds rate, but the real rate, the FF less inflation, is still negative. Rates are still very accommodative...although the FED left that word out of the statement today. Watching Powell is like watching your Accounting professor discuss reconciling the balance sheet on a late spring afternoon. He and the FED continue to use words like transitory, gradual and appropriate, a decade into a recovery and we are still using these words. The dot plots are all calling for continued hikes peaking around 3.25/3.65%. We view this as highly opportunistic and we do not think the global economy nor the domestic economy will be able to absorb such a short rate given the sheer size of global debt growth. For those that haven’t seen, we often use our own “dot plot” picture:
Last week we saw NFPayrolls rise 213k above the 195k that was widely expected. May’s payroll report was also revised higher by some 21k to 244k. One weak spot was that the unemployment rate saw a .2% up tick to 4.0% and the average hourly earnings
We decided to start this week's letter with the latest data put out from the Federal Reserve's latest "Survey of Consumer Finance." The headline data posted shows that the share of overall wealth of the top 1% of Americans was 38.6% and the other 90% of Americans held just 22.8%, which means that the wealthiest 1% of this country are some 70% richer than the other 90%. We have said all along that the QE policies of central banks have benefitted only the top 1% in terms of income distribution. This isn't the type of capitalistic distribution I think general Americans had in mind from their monetary printing overlords. However, we know that the inevitability of such an outcome was almost guaranteed.
We have written exhaustively on this subject and it is one of the reasons many don't understand why the equity markets continue to rise. As we talked about last week, the risk is now moving to central banks and their respective governments and away from private wealth generators, or public companies. Even more so is this largesse beneficial in private equity land where capital is clearly abundant and as such, begets the reduction in public shares available as M&A pushes for alpha and yield and thus must consolidate, stream line, strip down and trim to mask the lack of true productivity.
We offer such data, not to frustrate the commoner, but rather to reinforce the driving principles behind the market movement, or shall we say lack thereof. This lack of volatility is not only present in the volatility indexes themselves, but straight up and obvious, especially in equity land, where the moves are quite linear as the ultra wealthy are flooding their excess cash in a constant compounding investment at its finest, buying frenzy. The equity markets have become the de-facto new money market as many are calling it. Pensions Partners put out a great webinar this week and we have this chart from them that distinctly displays the lack of volatility in the SP500 market: