Sometimes it’s the things you miss that end up being the costliest.
Fifteen years ago, then Chairman of the Federal Reserve Benjamin S. Bernanke wrote an opinion piece for the Washington Post.
But back in 2010, fear still ruled the roost. People wanted almost nothing to do with stocks. They certainly didn’t want anything to do with real estate.
Anything risky was just about off limits. Everywhere you turned – on TV or in print – it was all about safety. It was all about fear.
Instead of stocks, buy a whole-life insurance policy. Instead of options, raise cash. Don’t buy a home right now. Rent instead.
But good ol’ “Helicopter Ben” knew something different. He knew he was about to light the markets on fire.
In his op-ed, he went on to say:
“[…] higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion.”
“…in a virtuous circle…”
Those four words are what most people missed. He wasn’t going to let everyone’s fear get in the way of what he was about to do.
He told us the playbook. And we didn’t listen.
The rest is history.
It’s one of the greatest bull runs of our lifetime. Since that op-ed appeared in the Washington Post, the S&P 500 is up 440%. And median home prices are up about 145%.
Every successive move higher made people feel better. The better they felt, the more they piled in.
A “virtuous circle” indeed.
It’s easy to say looking back on it. But at the time, very few people understood what was happening.
If you were one of the few, hats off to you.
Today seems like a different environment. The S&P 500 is near its all-time high. Even old stalwarts like gold are hitting new highs.
Yet there’s a lot of chatter about how the market can’t possibly sustain this type of pace. It’s about to roll over and crash. Heed the warning…
Or can it? What if Bernanke’s “virtuous circle” was just Act I?
If you look closely, we may have just gotten the signal for Act II.
Run It Hot
In a tradition dating back more than 40 years, the Federal Reserve Bank of Kansas City hosts its annual Jackson Hole Economic Policy Symposium in Jackson Hole, Wyoming every August. The invite-only event includes Fed officials, heads of other central banks and leading economists.
It’s also one of the most anticipated events in the financial world. And it happened just last week.
Everyone waits for comments from whoever happens to be the Fed Chairman at the time. They hang on every word looking for any clues on how to position their portfolios.
In recent years, current Fed Chair Jerome Powell disappointed the plebeians. They want to continue the “virtuous circle” years of the Bernanke era.
J-Pow
But J-Pow – as we like to call him – wasn’t having it.
After the COVID years sent inflation levels to multi-decade highs, his motto became “higher for longer.” Meaning raising interest rates at the fastest pace in history to tame inflation. Then keeping them there.
He had a job to do and he didn’t want to become the next Arthur Burns.
At least, that’s what everyone thought going into last week’s Jackson Hole meeting.
Then J-Pow came to the podium. In his speech, he talked about the Fed’s “Statement on Longer-Run Goals and Monetary Policy Strategy” document first introduced by Helicopter Ben in 2012.
More importantly, he talked about changes made to that policy after the last review in 2020.
Here’s what J-Pow had to say:
Overall, while the labor market appears to be in balance, it is a curious kind of balance that results from a marked slowing in both the supply of and demand for workers. This unusual situation suggests that downside risks to employment are rising.
[…] with policy in restrictive territory, the baseline outlook and the shifting balance of risks may warrant adjusting our policy stance.
This focus on promoting a strong labor market underscores the principle that "durably achieving maximum employment fosters broad-based economic opportunities and benefits for all Americans."
Just like Bernanke told us the playbook in 2010, J-Pow is telling us the playbook today.
Fed-speak may not be that easy to decipher. But J-Pow couldn’t be clearer: the Fed is now more focused on the labor market. Inflation is taking a back seat.
It’s J-Pow’s own “virtuous circle” moment. The Fed is eventually going to run it hot. Interest rates are almost certainly heading lower.
If isn’t a question. It’s a matter of when.
What happens after that is anyone’s guess. And this time, I believe it will show up in the ignored corners of the market. Like small-cap and micro-cap stocks. The kind of companies we focus on here at Strategic Trader.
Whatever you think, if history is a guide, you know what to do.
Regards,
Editor, Strategic Trader