Q3 Earnings – GDP – Fed Disconnect

FOMC Minutes released last Wednesday indicate desire to shift from neutral to restrictive policy placing a .5 % rate hike in play for December.

WHY?

Existing Home Sales reported a year over year contraction of 4.1% as mortgage rates have risen 25% from 4 to 5 % due to 2018 Fed hikes.  Examination of labor supply (37% not participating), capacity utilization (78.1 %), increasing global competition, manufacturing cost reduction benefits from technology, roll back of unproven regulations, and increasing efficiencies in inventory management and transportation makes it difficult to argue inflation is a viable threat.  Deeper examination tells us Oil is higher because of infrastructure capacity limitations not production; and that build out to significantly increase capacity is scheduled for completion beginning in mid-2019.

According to FACTSet, with 17% of companies reporting, increase in earnings of 19.5% over Q2 exceeds expectations of 19.3%. This makes Friday’s first look at Q3 GDP of 3.3%, down from 4.2% for Q2 questionable. Especially when you consider Q2 earning exceeded Q1 earnings by 20%.

Please note a .25% December Hike would represent a full point increase for 2018 and $220 B addition to the cost of financing $21 T Debt.

A .5% December Hike would represent 1.25% 2018 increase for 2018 and $275 B addition to the cost of financing $21 T Debt. This translates into about 1/3 of the budget deficit and also represents more than 1/3 of Defense Spending for Fiscal 2019.

Fed Dogma says raising rates is necessary to prevent economy from overheating. Given repressed GDP since 2008 there is a lot of catching up to do. The more Mom and Pop participate in an expanding economy the more sustainable growth becomes. Their entrepreneurial participation provides essential underpinning by increasing competition that in turn restricts inflation of consumer costs. Rising interest expense represses value creation and in turn compromises sustainable growth.

Current market conditions are manifesting Trump Administration Policies strengthening the middle-class. The Fed raising rates based on Dogma instead of actual market conditions can be viewed as actively working against the well-being of and improving prospects for the middle-class. Significantly increasing mortgage costs, capital for entrepreneurial efforts, and student loans.

Current Fed Policy is destructive to the long-term well-being of the middle-class; and the U.S. economic engine it powers. When the middle-class expands and earns more; entitlement spending goes down and treasury revenues increase. A twofer for reducing the budget deficit and paying down the debt.  Too bad the talking heads of the Aligned Media do not comprehend the conditions required for intelligent risk. The Fed’s destruction of the middle-class will continue unchecked until they speak up.