What Jerome Didn't Say

Proposed editorial amendments to Mr. Powell's speech in Jackson Hole

(Source: Getty Images)

Joel Bowman, checking in today from Buenos Aires, Argentina...

Jerome Hayden Powell took just 8 minutes to deliver his remarks at the Fed’s colloquium in Jackson Hole on Friday, one of the shortest speeches there on record. Word for word, these may well have been the most expensive utterances of Mr. Powell’s career thus far. The key passage:

“There will very likely be some softening of labor market conditions, while higher interest rates, slower growth, and softer labor market conditions will bring down inflation. They will also bring some pain to households and businesses. These are the unfortunate costs of reducing inflation.”

On hearing the words “slow,” “soft” and “pain,” investors promptly began panicking…

Fox News called the chairman’s remarks a “sobering prediction.”

“The Stock Market Finally Heard Powell’s Message Loud and Clear,” came the headline in Barron’s. “It Wasn’t Pretty.”

Bloomberg, meanwhile, ran with the billionaire angle...

Powell’s 8-Minute Speech Erases $78 Billion From Richest Americans

This last story went on to relay, with ill-disguised glee, how Elon Musk’s paper wealth fell by $5.5 billion on the session... Jeff Bezos lost $6.8 billion... and messrs Buffet and Gates lost $2.7 and $2.2 billion, respectively. 

Our guess is that the above-named gentlemen will not be missing a steak dinner anytime soon. So let’s return to the realm of the every-investor. 

By the close of the session, the Dow Jones Industrial Average was down 1,008 points (3%)... the S&P 500 was lower by 147 points (3.4%)... and the Nasdaq was off by 497 points (almost 4%). 

Ouch! 

Between the Lines

Mr. Powell, by all accounts an affable fellow with an undeniably solid sartorial sense, might have nonetheless taken a few extra seconds to expand upon his pithy remarks, if only to reduce their cost per word. 

Now, it goes without saying that nobody asked us here at Bonner Private Research for any input. (Probably a wise move.) Even so, in the spirit of clarity and honesty due the long-suffering American worker, we offer some unsolicited editorial suggestions just the same.

To the “some softening of labor market conditions” line, for example, Mr. Powell might have added, “which will disproportionately impact middle and low income Americans, many of whom have been forced to take second and/or part time jobs to make ends meet. And here, I’ll level with you a bit... 

[Pause for effect] 

“You see, behind the ‘528 thousand jobs added in July’ headline, some 385 thousand of those fell into the ‘second’ or ‘part time’ designation. Hardly a sign of a robust economy. In fact, the labor force participation rate is back to where it was in April... of 1977!

“Moreover, adjusted for inflation - which I’ll come back to in a second - workers’ real wages are actually going backwards... so no matter how many extra jobs the common laborer or blue collar worker takes on, he’s unlikely to find enough hours in the day to keep his head above water. Okay, moving on...”

Here Mr. Powell might have paused once more, letting the gravity of his words sink into the collective consciousness of a nation already deep in recession. A prolonged, steely-eyed gaze over the distant mountains ought to add some faux pathos to his performance.

High on the Hog

Onto the “some pain to households and businesses” line, here Mr Powell might have elaborated a little further, too...

“Of course, such pain won’t be felt by the billionaires you read about in the newspapers. Messrs Musk, Bezos, Gates, et al. are doing just fine. Matter of fact, thanks to our easy money policies at the Federal Reserve - and here I give a special shout out to my dear partners in cri... ahem, ‘colleagues,’ Janet, Benny and Al - the billionaire class has never had it so good in this country. 

“Able to borrow cheap money at ultra low, even negative rates, meant cash in their corporate coffers even as working and middle class families were mostly treading water. Throw in stock buybacks and no end of handouts, corporate subsidies, green initiatives and various other state-sponsored loopholes and shenanigans, which enjoy largely bipartisan support from our friends over in congress, and the rich have lived plenty high on the Fed’s hog, thank you very much. 

“Sadly, nothing in this world is free, not even the Fed’s funny money. Somehow, some day, someone has to pay. Which brings me back to everyday, working Americans...” 

At this point, Mr. Powell might have rolled up his sleeves, as politicians sometimes do, to affect some solidarity with the folks on the factory floor. 

To the “unfortunate cost of reducing inflation,” the head of the world’s most powerful central banking system might have appended “that we, as central bankers who flatly refused to see what was obvious to any non-wonk in the land, had a heavy hand in causing. 

“You’ll recall we assured you there was nothing to be concerned over here, that inflation, if we ever did manage to conjure such a thing, would only be ‘transitory.’ Well, as I said before, the word ‘transitory’ means different things to different people. So that ought to be the end of that. And now, as you can see from my rolled-up sleeves, we now have the matter firmly in hand going forward. You can, as always, trust us to guide the ship from here on out. 

[Final pause]

“Lastly, I should mention the good and, it must be said, rather handsome gentlemen over at Bonner Private Research, who sent over some notes regarding my prepared remarks today. They tell me they’ve got a newsletter on Substack you can sign up for that will help you make sense of anything my colleagues and I say from this podium going forward. I’ll see you all at the bar afterwards for cocktails and hors d'oeuvres. Good day.”

Gee, thanks Mr. Powell! You’re too kind. Speaking of making sense of the big picture, BPR’s macro analyst, Dan Denning, has been catching new readers up with some of the key indicators he and Tom use to help them get a sense of where we are, historically... and where we’re likely headed next. 

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Here’s a choice snippet from Dan’s note to Bonner Private members this past Wednesday...

First, welcome to the many new readers who’ve joined us over the last month. If you’re anything like previous new readers, you may be astonished (and even skeptical) when you read our forecasts that $50 trillion in wealth could be wiped out. Or that stocks could fall by 50-75%. 

If you're unfamiliar with our work, these might seem like exaggerations. Or worse, doom-and-gloom forecasts designed to scare you. Marketing hyperbole at its worst. 

But all of these forecasts are rooted in real hard data and historical precedent. There are several macroeconomic indicators we use to make them. Take the ‘Buffet Indicator,’ for example. It’s the ratio that compares the total market capitalization of publicly traded stocks to the total GDP of the American economy.

It’s named after investment icon Warren Buffet. Buffet uses it as a simple ‘big picture’ valuation metric. Look at that ratio over time, and it should tell you whether stocks are cheap or expensive.

It doesn’t tell you what to buy. That’s a ‘tactical’ decision based on stock selection and research. That’s Tom Dyson’s beat, as Investment Director. But the market-cap-to-GDP ratio does tell you whether it’s a better time to be a buyer or seller of stocks as an asset class (you can be bearish on the market and still buy certain sectors, by the way….Buffett has been buying oil and gas stocks hand over first recently).

The 'Buffet Indicator’ made a triple top at around 203% late last year. Stocks were more than 200% of GDP. Then it fell to 147% on June 16th. And that's STILL above the peak of the dot.com bubble of 140%. 

Just to be crystal clear: relative to GDP, stocks are still massively expensive. 

Here’s the thing. The historic mean for the ratio is 81%. If you do some back-of-the-envelope math, you get some ugly numbers. Ugly, but again, rooted in data and reality.

Let’s say current GDP is $25 trillion. It’s $24.8 trillion, according to data from the St. Louis branch of the Federal Reserve. But let's round up. The total market capitalization of publicly traded US stocks is $42 trillion (down $7 trillion from $49 trillion in late December). So what?

If the median market-cap-to-GDP ratio is 81%, the the stock market would have to fall to $20.25 trillion for the ‘Buffet Indicator’ to return to its historic median. If you’re scoring at home, that’s a wipe-out of almost $22 trillion off the value of stocks. It’s a 52% decline from today’s levels.

That’s ‘the big loss’ we’re trying to help you avoid. It happened in 2000. It happened in 2008. And it happened during the first ‘big one’ in 1929. Do you think it can’t happen again?

Readers who are not yet enjoying Dan and Tom’s twice weekly market notes may wish to do so by unlocking their full membership benefits, below. This includes half a dozen or so special reports (Gold, The Dollar, The Trade of the Decade...), plus private briefing recordings and transcripts, Tom’s stock watch list and much more. Check it all out, here...

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And now for Bill Bonner’s missives from the past week...

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And that’s all from us today. Dear Wife is hosting an free online conference with a panel of world renowned stoic philosophers as we type these words to you (see here, if that’s your thing)... so we’re heading out for a father-daughter lunch at one of our favorite barrio parrillas, La Dorita. 

We’ll be back with your regular Sunday Session tomorrow. In the meantime, have a great weekend.

Cheers,

Joel Bowman