Fed officials don’t speak too much: The central bank and its chief, Jerome Powell, believe the 2% inflation target is sacrosanct and would risk a recession and a bear market to get there.
So why are the markets going up so hard – as if Powell is about to cut rates soon, not raise them?
The answer is that many traders and investors are convinced that what was once the lowest political class in government – the Federal Reserve – has become among the most politicized. Powell Its main function is to keep inflation rates lowHe will give up the inflation target for something more palatable to please Congressional Democrats and the Biden administration’s economists.
It is fashionable in left circles to accept inflation when necessary. Higher prices do not matter as long as government budgets increase.
When will they forget the horrific stagflation of the 1970s in which the economy slowed while prices rose. It doesn’t matter if you have a job. You can’t put enough food on the table and gas in your car, let alone buy a new one or eat at a restaurant.
So where’s Powell’s head?
Stock traders say Powell’s history of monetary adjustment and recent dovish comments are sure signs that he will settle on a 2% target for something higher, possibly much higher. So they are in a buying mood.
Conversely, Fed watchers who have sources in Powell’s inner circle tell me the central bank Understands the need to eradicate inflation. This means higher rates, a downturn in the market, and a possible recession.
Neil Kashkari, the greedy chair of the Minneapolis Federal Reserve, echoed much of that sentiment at an Aspen Institute conference last week. Certainly, he and his colleagues like the trend of the CPI, which fell to 8.5% in July from 9.1% the previous month. However, he made it clear that the Federal Reserve is so ‘Far, far from declaring victory’ over inflation.
In the meantime, what we have is a classic decoupling from the market, which is never a good thing because shareholders may not realize that a tsunami is headed their way. Unfortunately, I was told, in Powell’s waning credibility as an inflation fighter. He is ironically known as “Blinky” in the trading desks and not because there is nothing wrong with seeing him.
Based on his track record, the common belief in dealing desks is that Powell is looking for a way out of his price hikes. He quickly “blinks” and justifies a higher inflation target rather than becoming the target of the powerful left-wing faction that currently runs President Biden’s economic policy.
The drop in inflation in July, however slight, gives it cover to begin reversing its course.
Of course, stock traders have been wrong before and in a massive way. In late 2007, the Dow Jones index hit a then-record of 14,000, pricing in an economic recovery. A financial crisis and a great recession soon followed.
They could be wrong again, unless Blinky blinks. It may be beneficial for the markets in the short term. The rest of us, not so much.
AMC’s Gift to ‘Monkeys’
Adam Aaron, CEO of AMC Theaters, has a tough job. Broadcasting was already putting pressure on its business long before it was shut down by COVID. With the pandemic largely into bad memory, and successful box office films like Top Gun: Maverick, His company is still losing money.
In addition, its investors are a group of retail traders who engage in conspiracy theories. They call themselves “monkeys” for reasons best known to them. They think they will get rich by buying AMC stock because they have discovered an evil gang of short sellers who want to destroy the company.
If they buy enough of it, they’ll crush the shorts and make mints.
Crazy, yes, but Aron needs the insane Apes to keep buying his stock because they are the only thing standing between AMC and a big chance of restructuring Chapter 11. To that end, he hatches a plan to make the monkeys hungry for his stock with a special dividend gift in the form of a new preferred stake. .
Once that happens, he says, the company will thrive through a financial technology known as “good dilution.”
Monkeys love what they hear. Aaron is known among colleagues as a “silverback,” and shares are up 31% since the announcement.
AMC stock, which traded at $3.19 on March 16, 2020 — the day the pandemic forced movie theaters to close — closed Thursday at $25.46. That’s a 698% increase,” Aaron told me.
Well, but stocks are also down about 66% from their highs last year, and don’t try to search for the term “good dilution” on Investopedia because it doesn’t exist. There is only dilution and this means that your holdings are less valuable because there are more shares traded.
He also delved into Aaron’s plan, as did professional traders like Marc Cohodes, and found that there is a dramatic wealth transfer that goes down with all this “good dilution.”
Once Aaron issues the new stock, Kodis points out, the monkeys will hand Aaron and the bondholders a check. This check will help him pay off debts that are beneficial to the large institutions that hold AMC debt as Apes keeps AMC away from bankruptcy.
Perhaps the true definition of ‘good mitigation’ is ‘rescue’.