May 9, 2024: Aggregate demand management by the Fed hasn’t slowed its biggest aspect, Consumer Demand, all that much. Consumers running out of pandemic savings and running up too much debt may become the more predominant effect. By contrast, aggregate supply has taken care of itself. That said, the higher interest rates have slowed growth more among the higher leveraged smaller firms, leading the smaller firm indexes to lag until just recently. Reducing aggregate demand growth through higher interest rates relative to aggregate supply growth has seen inflation come down considerably. Still, services and housing reflect some stickiness, which is to be expected. The Fed can only act generally, not specifically — sort of like you cannot spot reduce fat by dieting.
The Feds balance sheet projection continues to show an accelerating run off due to maturing debt. The money supply projections though have changed. Previously showing a significant decline in the broader monetary aggregate M2, projections now indicate a money supply that is holding relatively steady. This is because the Fed has recently increased its balance sheet through newly issued treasury bond purchases and actually increased the money supply. This recent and excessively accommodative Fed policy appears transitory and short-lived. This is because of the negative returns from bonds caused by weak auction demand and steadily rising long-term interest rates. In fact, yesterdays $42 billion 10 yr not auction was also characterized by weak demand. Nobody wants to by long-term bonds if they think all the debt being fiancé by the treasury will continue to push up rates.
Along with rising long-term interest rates which are contractionary, the Fed is sounding less hawkish because they know they must somehow try to keep interest rates from rising too high, too fast. Thus, the Fed must accommodated the mountain of debt by re-purchasing some of what matures on its balance sheet. Luckily, inflationary projections are in their favor as they fall to 2% and even less very soon. If this proves true, it will open the Fed to more aggressive bond purchasing, which is very expansionary. Along with that, they will probably start decreasing the discount rate.
Given such an economic backdrop, investing in stocks appears warranted. For growth consider: ALL, TSN, HIMS, HEAR, GVA, CLS, TNP, GRBK, MTX, and THC. For dividends and growth consider: BRY, HAS, WU, BEPC, EPD, MO, NEP, OUT, PAA, and UGI. Over the last three months, the fastest growing ETFs were: SMH, XLE, PSI, SOXQ, and SOXX.
