Wall Street Unplugged
Episode: 966November 2, 2022

Why the Fed can’t save the markets

Later today, the Federal Reserve will hike interest rates yet again… but that’s hardly news at this point. The real news is what will happen afterwards—during the Q&A—and whether the Fed will start turning dovish…

Daniel and I discuss why the Fed is stuck between a rock and a hard place when it comes to combating inflation—and you shouldn’t pin your hopes on a dovish Fed… Why we could see a higher inflation target by the end of the year… How the Senate and Congress are attempting to pressure Powell… Why there’s no hope of a soft landing at this point… And why the Fed can’t save the markets.

Plus, I share how to multiply your money as the Fed’s mistakes crash the market.

Inside this episode:
  • We could see a major change on inflation targets [2:30]
  • The Fed’s hands are tied [4:20]
  • How elected officials are pressuring Powell [13:25]
  • The Fed can’t save the markets [16:30]
  • Despite the bear market, equities still aren’t cheap [24:40]
  • How to profit from the Fed’s errors [26:25]
Transcript

Wall Street Unplugged | 966

Why the Fed can't save the markets

Announcer: Wall Street Unplugged looks beyond the regular headlines heard on mainstream financial media to bring you unscripted interviews and breaking commentary direct from Wall Street right to you on main street.

Frank Curzio: What’s going on out there? It’s November 2nd. I’m Frank Curzio, host of the Wall Street Unplugged podcast, where I break the headlines and tell you what’s really moving these markets. It is Wednesday, bringing in the good-looking great golfer, awesome analyst, Daniel Creech. What’s going on buddy? How’s everything.

Daniel Creech: Very kind of you, Frank. It’s another wonderful Wednesday. Hey, today’s a special Wednesday. I’m not a big fan of children of my own, but I do have a nephew who has a birthday today. So happy seventh birthday to my nephew, Henry.

Frank Curzio: Oh, that’s cool.

Daniel Creech: I FaceTimed with him this morning. He is good, and they’re gullible at that age, so just send them fun toys and they’ll love you forever. It’s a great uncle, long distance relationship. It’s fantastic.

Frank Curzio: It’s always fun. It’s always fun when you have kids or, yeah, they’re not your own kids, because you only have to spend limited time with them.

Daniel Creech: Maybe the fun is selective.

Frank Curzio: Being grandparents, also, like, “Oh, they’re so great.” So, you buy and they leave. It’s like when you have to spend the entire day, it’s like, “Oh, my God.”

Daniel Creech: It’s like the good and the bad. No, I don’t any of that.

Frank Curzio: I know, I know.

Daniel Creech: It’s like marriage vows. You know, what happened to happy, healthy, and we wealthy?

Frank Curzio: Wait a minute, maybe, “I didn’t sign up for that. It wasn’t in the vows. What was that? What?”

Daniel Creech: No, but it’s another great Wednesday. It’s always good Wednesday. I hope everybody else is doing well. Frank, we have the Fed coming up later today.

Frank Curzio: Oh, that’s right. The Fed’s going to meet today.

Daniel Creech: Nothing to talk about other than the Fed and the tangle of webs that we can weave through that, my friend.

Frank Curzio: It’s good that we tape this early. I like doing it this way, because we tape it early. We tape it around 10:45, 11:00, so it’s before the meeting. But when you get this, it’s going to be after me. I doing it that way because it really like, “Let’s see what they’re going to do.” Everybody knows, 75 basis point hike. We’ll talk about that in a minute. But I like talking about it before, because after, it’s so easy to play Monday morning quarterback, where it’s like, “Okay, here’s what we said, and here’s what we think.” And then, you can break it down tomorrow, later, whatever. But this is the fourth Fed meeting. Let’s see what happens. I don’t know if the market could be up or down 500 points or a thousand points after this. We have no idea. But let’s talk about, yeah, it is a big deal, but it’s not the 75 basis point hike that’s a done deal.

Frank Curzio: It’s more about what they’re going to say after. And to me, I just think it’s kind of funny what people believe that the Fed may take a more dovish tone, but I want to start off with you. What do you think of this meeting? It is important, but it’s the language that they’re going to say afterwards that’s much, much more important, of how much they’re going to raise, where they’re going to go, what are they seeing right now? And I don’t know, I think people are expecting positive things in terms of the Fed coming out and being dovish. Meaning that they’re not going to continue to raise, or they may actually stop it pretty soon, or they’ll announce that. I don’t know. But what are your thoughts?

Daniel Creech: I think it’s a coin toss. I hate to be on the fence, but the leaker that everybody jokes and points to through the Wall Street Journal, come out a week or so ago, and to your point, started this whole notion of they’re going to raise 75 basis points, and then they’re probably going to use softer language about going forward. Maybe in December we’ll have a 50 basis point hike. Then they kind of walk that back, that gentleman. To your point, we were talking off air with the economic data that has come out recently. I don’t see how the Fed doesn’t continue its strong tone because of the market rallying things. The only prediction I can give you is, I don’t think they’re going to at this meeting, but I think in December, Fed will be the Fed Chair, Jerome Powell, will be a Christmas Grinch, Frank, and be ruining everybody’s Christmas. And he will try to bring some Christmas joy, and what is he going to do, Frank?

Daniel Creech: He is going to say that we are going to raise the level of our target inflation from 2%, and it’s going to be easier to live with between three and 4%. They’re going to have to start using that language in getting the market conditioned for higher interest rates for a longer period of time than what they’ve had. And they’re not doing very well in the batter’s box. They look terrible from the transitory comments. They look bad from previous… And I know you’re going to get into this, projections, rate hikes that just go back a handful of months ago.

Daniel Creech: I mean, we don’t even have to go back further than this year. And you just see how wrong they’ve got it. It’s okay to be wrong in a sense. However, these guys, when they’re wrong, it affects not only our economy, but the global economy. My big prediction is they’re going to have to, in December, start conditioning the market that the 2% target is as goofy, as transitory as it was when it comes to inflation. And they’re going to have to read that. And I think, honestly, even though that’s terrible, I think that’s going to be received very well.

Frank Curzio: It’s funny because the data you talk about is the ISM data. And this just came out this week. So, ISM was supposed to be a little bit weaker, so the Fed, what they’re trying to do is slow down demand. That’s their job. They want to curb demand, which is going to curb inflation and stop spending. And the JOLTS number, which is really good. And when you’re looking at JOLTS, it’s just number of job openings. And last month, you saw that come down, which is what you wanted to see, fewer job openings, because what they’re doing is, they’re trying to get the unemployment rate much, much higher. They want to get it to over 5%. People say over 4.5%, but it’s over 5%, where they feel comfortable, where, okay, that will control wage inflation, inflation will start coming down. And out of nowhere, the JOLTS number came out.

Frank Curzio: I think they’re expecting a reading of 10 million, just put in perspective. And it fell by a million last month. This month, it was up. So more job openings, signals that the economy is so strong right now in some areas, and that’s fine. But it was a number that came out that really surprised. But what does that do? It’s a big deal, because the Fed has been saying that their 100% focused on destroying inflation. Now they’re going to come out, and they’re going to say, and again, we’re doing this early and people are happy because, I love the sentiment here, Daniel, which is leaning positive, so the Fed announcing that, “Hey, they’re going to slow the rate of increases.” No fucking kidding. Of course you’re going to slow. Of course you’re going to slow.

Frank Curzio: Well, if you put in perspective, this is going to be the fourth straight meeting of 75 basis point hike. Okay, let’s put that in perspective. When the Fed raised rates by 75 base points in July, that was the first time in modern Fed history that Central Bank raised interest rates by 75 base points, and now it’s the second time in a row. It’s the first time it happened in Fed history, twice in a row. Now, we’re going to be at four times in a row. Of course, they have to slow the pace. They kind of should have been slowing the pace, but you’re not really seeing it in the numbers that they look at because of the data that they look at, so you’re not seeing on the CPI, you’re not seeing a core CPI.

Frank Curzio: I don’t know how the Fed could come out and say, “Listen, we’re almost done.” And that’s what the market is expecting. And they’re hoping that, “Hey, you know what? We’re almost done here. We’re seeing it. Where are you seeing it?” You’re not really seeing it in too many places. You are seeing it in some places, but not in the places that the Fed looks, which is the CPI, which is rentals, energy, food. You’re looking at the companies that reported good earnings. It wasn’t because of strong demand, where they’re selling more, they’re selling less, but they’re raising prices, and they continue to raise prices. Their margins are increasing. You can’t stop here. I mean this notion, I think, is hilarious.

Daniel Creech: Do you think people… Oh, sorry, go ahead.

Frank Curzio: No, no.

Daniel Creech: Let me interrupt you. Do you think people are thinking they’re going to stop? Because I thought they were just going to, they’re going to continue to raise. It’s just not, to your point, not going to be at 75 basis point increase.

Frank Curzio: Which is obvious, but that’s been the positive, like oh, the Fed’s going to come out.

Daniel Creech: But I don’t think the market is anticipating a stop. They’re anticipating further rate hikes.

Frank Curzio: If they say that if they don’t give a date that we may pause in December or January, we may look to pause. If they don’t say that, I think the market could come down,

Daniel Creech: Gotcha.

Frank Curzio: Okay. Okay. And I think that’s what’s expected that, hey, we’re looking for something hinting that you may pause.” Slowing the rate hikes down from 75 to 50 basis, which we’re like going to get in December, and then going 25 base, which is normal, 25 base point hike. That’s normal. That’s normal, what you do all the time. You never do something like this. But I think people are going to be disappointed, because the Fed made it clear that they want to control inflation, they need inflation to come down. It’s not really coming down. Hey, you’re looking at the core, CPI has not peaked, so how could you actually talk about it and hint about it? Because maybe that could fuel the economy or fuel the market more, whatever it is.

Frank Curzio: But when I hear the commentary out of the media and lots of analysts, I think it’s hilarious because they think that it’s possible. Even the Fed thinks it’s possible. Well, politicians, I get it, they’re going to lie. You want to say this. But they’re going to say, “Okay, we’re going to raise rates and have a soft landing.” I’m going to tell you right now, there’s only two options here. Destroy the economy, you destroy demand or have won by inflation. It’s one or the other. You’re not going to have a soft landing here. And you have to realize that, you can’t have both. So, the easy landing shit is hilarious to me. You hear, “Oh, easy landing, the economy’s still doing good while they’re raising rates.”

Frank Curzio: You’re going to see cracks, and we’re seeing from certain companies, we’re going to see it in certain markets. And if you want to know why this is extremely dangerous, okay, I want to break this down for you, Daniel. Okay, I told you this offline; this is really important. The Fed funds raise, expect to peak over 5%, right now, as of today. That’s supposed to take place in May, 2023. So, it’s supposed to peak at 5%. Why is that such a big deal? That’s the highest that we’ve had. Now, it’s important to talk about this, important for investors to understand, especially in long equity. So, in June, it was the first time since in 1994, the Fed has rolled out 75 basis point increase, in 27 years.

Frank Curzio: Then in July, they did it twice. Now when they did it in July, only four months ago, the Fed funds rate, the Fed… The Federal Reserve predicted only four months ago that rates would peak at 3.8% in 2023. Now it’s over 5%. Gets even better. I mean, that’s the reason why stocks really surged from July through August, mid-August, they went up 16%. She’s like, “All right, we have a top. We have a data point that it’s not going to be higher than this. And then when we find out, holy cow, this isn’t working and we’re not seeing inflation come down, they’re going to raise it. That’s when we saw the market really crater again and hit new lows. But then, September rolls around only a month a half ago. So now, they’ve raised rates 75 rate points a third straight time.

Frank Curzio: At that meeting, the Fed said, “You know what? They’re going to peak a 4.6% 2023. Now today, over 5% after they come out with this, I’m sure because they’re going to probably peak at. Then I’m just going to go to five and a quarter percent.” You have to understand that this is unprecedented. We’re in uncharted territory here. We’ve never raised rates this much this fast in history. You’re seeing breakdowns in companies, where some of them are reporting okay results. They’re able to pass on higher costs. But it’s happening extremely quickly, so quick that you have Google and Meta not able to cut their costs and lay off employees fast enough. And that’s why they reported earnings that completely shit the bed.

Frank Curzio: It’s happening very, very fast. And the change in environment and demand’s going to shut off much, much more faster than anyone anticipates because we’ve never seen the likes of this. Housing market is frozen, they’re done. We’re hearing it. You’ve heard stories from your contacts as well. I’m hearing stories from my contacts now. I mean, everybody’s cutting back. People are left with tons of inventory. It’s ugly out there. And when you’re looking at what the Fed is doing, if they’re looking to control inflation today, there’s no way they can come at. They’re going to say we’re going to slow down the pace, which is obvious because you better stop going 75. It’s just going to happen so quickly. But in a four-month period, to say that we are going to peak in 2023, 3.8, and now we’re over 5%, that is massive.

Frank Curzio: Remember, we’re used to 25 basis point hikes. That is a massive difference in four months, but that’s how quick you are going to see it. Wait until earnings season next time around. You’re going to see a dramatic change just like we saw with this earning season. You would think everything’s like kicking ass and everything’s good and companies are reporting earnings. Three months ago, I told you, if you look at facts what analysts expected Q3, this quarter S&P 500 earnings had grown by 10.2%. They lowered them significantly into the quarter. You know what, they’re up right now 2%. Would you think that? Because if they kept that 10.2% number, 80% of these companies would’ve missed estimates. Outside of energy, a lot of them would miss estimates. So, if you exclude energy, they’re going to decline easily 3, 4% plus this quarter.

Frank Curzio: And we’re expected to grow this year and into next year with earnings. And that’s where I think the disconnect is. How do we get to this crazy earnings number without the liquidity coming out of the market, with the Fed rates higher and higher and higher? Interest going higher. The housing market is frozen. Major, major component of growth for the economy. Global growth as well. It’s difficult to see how this is going to turn out good, but maybe you have the answer. How is this going to turn out good?

Daniel Creech: It’s not. It’s a hard landing, Frank you know that.

Frank Curzio: And guys, if you go to YouTube page-

Daniel Creech: It’s a hard landing.

Frank Curzio: And watch Danny’s face when I ask that question, he just looks, he’s like-

Daniel Creech: That’s terrible. It’s a rhetorical question. But investors need to brace for, listen, you can’t tinker with the economy at the level that they did, and do, and have for years and years, without having crazy stuff. So, from a mental state of mind, just think about, you’re going to see a lot of record this, record that. Just try to ignore most of that because, and you’ve done a good job on explaining different things on money, supplies, and all that. Well, when you do and take actions and print trillions of dollars and give that to people and let that go race around in the economy, you’re going to have records. And when you do that by volume, it’s only going to lead to that.

Daniel Creech: And to think that there’s going to be a soft landing, and everything’s just going to kind of go okay. I just think it’s silly. I don’t think you should expect that. I think you should ignore those people, for the most part, that try to say that. Ask them the data points they’re backing that up with. I think you should be prepared for a hard landing, meaning protection, a lot of cash, and things like that. I do want to talk about the penmanship hobbies of our Congress and elected leaders going around. I think it’s up to two or three now. Letters sent to Fed Chair Jerome Powell by different members of Congress and senators and all that kind of stuff.

Daniel Creech: And this latest one that, I think was published either yesterday or Halloween, would’ve been a good trick or treat, Frank. “Dear chair, Powell,” Now, this is signed by a number of people, Senator Elizabeth Warren, Bernie Sanders, and some others. “We are writing to express concern and request additional information.” Got that, Frank, they give a deadline too. “Additional information about the implications of the Federal Reserves, most recent economic projections. Its intentions to continue raising interest rates at an alarming pace and your disturbing warning to American families that quote, ‘they should expect more pain.'” Frank, pain is used a couple times in this. That’s a good drinking game level, “Over the coming months as the Fed takes forceful and rapid steps to get supply and demand back into alignment by slowing the economy.” They reference this, then they use his own quotes and things like that.

Daniel Creech: This is interesting because A, it’s political season. We got the midterms coming up. I just want to give another kind of shout out to public interest in general. If you think the Fed is independent like they tell you, you need to…

Frank Curzio: Of course not.

Daniel Creech: You need to rethink that.

Frank Curzio: Nobody does.

Daniel Creech: And the pressure being applied here is going to play into effect. Everybody is gettable to a certain extent. Jerome Powell doesn’t want to be tar and feathered and made to look like a fool more than anybody else does. And it’s interesting, this action to write and get, this is smart politically to get out in front and trying to act like you’re part of the people and want to help the average Joe and write this letter. But things like this is what you need to pay attention to, because this does help shape policy and people. And it’s just hilarious to see the number of letters being written to the Fed Chair Powell.

Frank Curzio: I think it’s hilarious, because the reason why we have inflation, a lot has to do with these idiot politicians. I mean, a lot of them, holy cow, sorry for cursing. There’re just all assholes.

Daniel Creech: Got to say Florida.

Frank Curzio: I mean, yeah, it’s just about themselves. I mean, our system used to be based on that we’re voting for someone who’s going to represent the people. They don’t represent the people, they represent themselves and do it in their best interest. And we’ve seen that through COVID. We’ve seen it from both sides. These guys are lawyers. They don’t know anything about the economy, most of them. And to see the amount of money that they’re spending and put through into this market, and this is 2021 into 2022, just constantly spending, spending, spending, just unlimited spending. People don’t realize this is trillions. I mean, to save the entire world from the financial crisis only cost four 80 billion.

Frank Curzio: That was given to the banks and bank controlled. Shore up the system and they decide who to lend to. This went directly to consumers, and they went on this massive spending spree. And you’re seeing it, the difference in companies, where it’s Roku or it’s streaming companies and how good they did during a pandemic compared to now. But a lot, all that money and a lot of it is being pulled out of the market. We’re not even talking about the Fed shrinking its balance sheet. We haven’t even talked about that. We just talk about them lowering rates. You have to get it out of your head, because if you’re looking at the past 12, 15 years, most of the people have been in this market over that timeframe. If you’ve been in longer, you understand, especially in the eighties.

Frank Curzio: But what happened in 2008, 2009, the Fed was there. Yes, they lowered rates, but they injected hundreds of billions dollars into the system. Same thing happened with COVID, except it was trillions this time, and they lowered rates. The Fed can’t lower rates, the Fed can’t inject money into the system anymore, because inflation is going to skyrocket even from here. And that’s something as you could see right now, the whole world could see it. This is like a train going downhill. It’s almost impossible to stop right away. You can’t stop it right away. It takes a long time. And the fact that the Fed is still raising rates when the market is down still 20%, even though when you see October as the best month since 1970 or whatever, that doesn’t happen in normal markets. Yesterday marked the 26th time this year, where the S&P 500 erased a gainer loss of at least 1% in a day. That’s the most for any year since the financial crisis. This doesn’t happen during normal times. What we’re seeing with the markets. We’ve seen a lot of companies report and some of them have pricing power. You’re seeing pockets of growth, and they’re going to be fine.

Frank Curzio: Other companies who are very, very smart are starting to cut back. They’re starting to see 2023, and they need to understand that consumers are going to tighten their wallets considerably. And there’s nobody out there to help them for the first time. That’s why this could be dragged out for much longer. This isn’t going to be quick. We’re used to market falling really quick and coming right back because the government’s like, “Here’s checks, checks, checks.” When you eliminate the gorilla in the room, the biggest growth callus that drove the markets, along with China, which who knows what’s going on in China. I mean, give me a break. We get so much information for so many good people, it’s awesome. But just the numbers are terrible. The COVID response, it’s horrible there right now. That’s another growth engine.

Frank Curzio: So, we’re seeing a lot of these growth, the two biggest growth engines are now gone. How are we going to grow earnings? I don’t know. Companies are doing it by raising prices. But again, you’re not going to consistently raise prices, when you’re seeing demand stop falling off a cliff and people have less money, and they’re not going to pay it anymore. You’re going to see this happen a lot quicker than anyone believes. And you’ve got to be careful. You got to position yourself. How could we be wrong, Daniel? How could I be wrong on this? You tell me, because either the Fed has to come out today and say “Okay, we’re probably going to stop in December, and then the market’s going to go higher and higher and higher.” We haven’t seen indicators come down enough where they want inflation at two, forget 2%. I love when you say that. You say they’re going to bring it down to 2%, and they want to get back down to-

Daniel Creech: I mean, it’s almost absolutely impossible. You’re not going to be able to get inflation down 2%-

Frank Curzio: I say 3, 3.5.

Daniel Creech: Unless, and listen. Going back to the seventies and eighties, when we… The Fed’s fund rate, Volcker. Think about this, you have to get the Fed’s fund rate higher than the inflation rate, basically. So, let’s round down and say inflation is 8% right now. And let’s round up after today’s Fed meeting, and we’ll get the Fed’s fund rate to around four.

Frank Curzio: Only going to be 4%.

Daniel Creech: Exactly. Yeah.

Frank Curzio: Only 4%.

Daniel Creech: You’d have to go from four to say nine to be comfortable and hope inflation doesn’t go higher between now and then. If you raise the Fed’s fund rate to that, what would the interest on the debt be? And I know nobody cares about that. But you’ll start caring about that globally, and it will have a huge psychological effect on markets and investors, and it will cause chaos.

Frank Curzio: Reed Calmez.

Daniel Creech: You know they can’t do that. That’s not an option.

Frank Curzio: Calmez has amazing statistics about the amount of money that’s spending and how those-

Daniel Creech: So, you can’t do that. So, what do you have left to do? You have to, in my opinion, raise the bar and say, “Hey, this is our new normal,” or you’re just going to fight this for a long drawn out time, and that’s going to be like a death by a thousand cuts.

Frank Curzio: Yeah, it’s going to be tough. It really is. Because just the indicators that go behind the CPI, you’re not seeing them come down. You’re not going to see them come down quick enough. December, we’re going to get another rate hike. But for those of you expecting the Fed to be like, “Hey, you know what, here’s… We’re probably going to stop.” And no, they have to slow down at pace. So, I don’t know why people are seeing that as a positive. That’s obvious. But I don’t know how the Fed could come out and be dovish at all, especially after manufacturing. The PMI, rentals are not coming down. They’re definitely not going to come down fast enough.

Frank Curzio: It’s just the housing market, the reason why it’s not going to come down fast enough is there’s not a lot of supply in the market, which is going to keep prices relatively high. We’re seeing prices correct, still very, very high year-over-year. But they are correcting, we’re seeing it. So, people need to live in homes. They can’t afford them, they can’t afford the rate, they can’t afford a mortgage. So, they’re going to rent. That’s going to keep rental incomes pretty high. Maybe they come down a little bit, but they’re not going to come down sharply. It’s a major component of CPI.

Frank Curzio: Oil prices, now we’re going to start putting more oil back into strategic oil reserve. We all know the situation. I don’t want to destroy whatever, but we all know that. Supply demand imbalance is insane right now. We’re going to see oil prices likely go a lot, lot higher. Look at the diesel shortages that we’re having, which you’re covering a lot and doing a great job. And then, you look at food prices. Food prices aren’t coming down. You look at every food company that reported, you look at their margins. I mean, their margins aren’t the same, which means they’re raising prices along with input prices being raised. They’re raising much more than that. So, their margins are actually going higher. Meaning that they’re raising prices well above those costs that they’re paying, which creates even more inflation.

Frank Curzio: So, how could the Fed come out, if you really want to slow inflation, which you need to do right away. It’s going to be interesting with this meeting, the expectations. Let’s see what happens. Again, it’s a lot of money on the sidelines. I told you yesterday, Goldman Sachs came out with a great report showing how a lot of money from mutual funds is coming in. They sell early into October to take the losses offset, potential gains. We could do that on the 31st. They do it before October 31st, and also a little bit of money in the sidelines.

Frank Curzio: But that’s seasonal. And usually, November’s a pretty good month. We’ll see, I think that month was October, but outside of that, I don’t know where the money’s going to come from to push into this market, when you’re intentionally drying up liquidity. You’re pulling liquidity out of the market. People are going to have less money to spend. Savings rates are at 3% lowest they’ve been since they’ve been tracking this stuff in 15 years, the way they track it now. It’s usually well over 7% on average pre-pandemic. So, where are they going to tap that money? Where are they going to get the money to pay these bills, to pay these higher prices? That’s where things get a little crazy.

Frank Curzio: And you’re going to see that start happening probably before next year. We’ll see. But again, there’s pockets of strength, I don’t want to tell you that, “Holy shit, you got to sell everything. It’s crazy.” Just prepare, understand what’s going on. Because Dan, you just told an interesting story about someone that you know, mentioned. But how some of these places, I don’t know how specific you want to get with the store, because I don’t know if it’s personal, of how they just over ordered completely without looking at the demand picture, which we’re seeing in autos. Ford just came out and said sales were down again. But we saw the supply chain concerns, and it’s massive demand. You have to meet massive demand for electric vehicles.

Frank Curzio: So, we got to produce like crazy. Do everything you can to fix that supply chain. Go nuts. And now, you fix it. And now, the man drops off a cliff. Now you’re stuck. Now you’re stuck with a ton of inventory of these cars that you’re probably not making money on right now, because they’re probably break-even, if you’re lucky. So, price is going to have to be raised on those, and now demand’s falling off a cliff. And it’s much more harder to get loan now with rates going higher and continue to go higher, so that’s what you see in a lot of companies. But you just told a story about that in another industry.

Daniel Creech: Yeah, it’s just not related to auto, I mean, it’s in housing, it’s in different things. You talked about a lot of lumber orders getting canceled, housing permits and things are way down. Out west in the Phoenix area where I lived, and still love that place… And by the way, it’s paradise right now, Frank. Everybody out there is loving life because the weather’s amazing. To your point, when you’re only looking at half the equation, you’re setting yourself up for a lot of pain. And suppliers from different industries, landscaping, all kinds of your service work are ordering like crazy. But you’re expecting or hoping that that demand is going to be there when all these products hit the shelf again.

Daniel Creech: And when you just factor in higher interest rates and the slowdown that works its way through the economy like that, to your point, a lot of people are going to be hurting when, “Hey this is great. Our stocks are full, shelves are full now.” And nobody’s coming in the door to buy anything or buy much less. I don’t want to say the world’s coming to a halt. That only happens during lockdowns, but that is something that you have to, I mean, investors just need to brace for a lot slower economic momentum, to say it nicely.

Frank Curzio: And for those that think that hey, what’s priced in, and we’re seeing stocks fall, and they’re trading at 70 times forward earnings. They’re trading at 70 times forward earnings that expect to go $244 next year. I think it could be closer to 190. I mentioned this in, this is a big, big data point. I don’t know why anybody’s really talking about it, but it was $160. We peaked in 2019, the end of 2019, we peaked at 159, 160 the year before. So, we peaked right there. And then, we had 11 trillion coming into the market and these massive earnings. Now, you’re removing that. How are we going to get over like 220? So, when you’re looking at the market, and they tell you it’s trading at 15 times forward earnings, that’s based on earnings that are projected next year.

Frank Curzio: I have no idea. You’ve seen how much they come down in the month. Daniel, you and I covered this. I haven’t covered this mean since Kramer years. All these companies, I love earning season. You cover, we cover it all the time. Outside of a crazy event like COVID or the credit crisis, you don’t see earnings projected to grow 10% three months ago and come down where they’re growing only 2%, and estimates have come down across the board. Not a specific industry, not something going wrong. Maybe oil prices. You don’t see something like that ever. That’s dramatic. And you’re going to see that core after core after core, as they continue to lower earnings, as they talk to these management teams, and they’re saying, “Holy shit, there’s some pockets of growth,” but a lot of areas we’re in, people are canceling orders, and you’re going to see it.”

Frank Curzio: People are going to tighten up because the Fed is forcing you to tighten up. Their job is to destroy demand, and they need to lower demand considerably in order to slow inflation. And the only way to do that is continue to raise rates. And we’re not seeing it right now. So, if you’re expecting good news from the Fed, they could come out and say, “Hey, we might stop in December.” That might be good news. I’d use it as a big opportunity to buy long dated puts, and have at least 20% of your exposure in that. And you’ll thank me, because you’ll be sitting on a massive amount of cash in a year from now that you’ll be able to buy assets for 10, 20 cents on a dollar, because that’s how crazy it’s going to be.

Frank Curzio: The Fed can’t accomplish this goal. They can’t. And you need to realize that. They can’t accomplish the goal where everybody believes it’s going to be a soft landing. It’s almost like if we were going to go to war with China, and we’re going to take over China. We say, “We’re going to take over China, but we’re not going to go to war. We’re not going to go to war, we’re just going to take because we don’t want anyone get hurt.” It’s like one or the other. You can’t have that, so you can’t have the Fed. And that might be the worst analogy ever. But you guys get my point. You can’t have a very strong market where the Fed’s doing everything they can to destroy demand. So, you’re going to see industry rates continue to go higher.

Frank Curzio: It’s not going to be a soft landing. It can’t be a soft landing. The Fed’s not going to be able to create a soft landing, and you got to be aware of that. To get a soft landing, I just don’t see it. Let’s see what happens over what the Fed says today. We’ll cover tomorrow. But it will be interesting. But a lot going on, a lot of earnings to the reporting. Pay attention to those conference calls and listen. Companies are reporting very strong results, but they’re also starting to say, “Listen, even with Maersk, largest shipper.” We talked about that earlier. Largest shipper came out and said, “Things are going to get really bad.”

Daniel Creech: Didn’t he say… I don’t have the quote in front of me. Wasn’t it, “Very cloudy ahead.” Or am I mixing things there?

Frank Curzio: No, no, you’re not mixing things up. So, I actually pulled the quote here. Give me a second. So, he said-

Daniel Creech: Clouds on the horizon.

Frank Curzio: Yeah, he goes, “It’s clear freight rates have peaked and started to normalize during the quarter, driven by both decreasing demand and easing supply chain congestion, freight rate surge in step with high consumer demand during the pandemic result in congested ports and delays. And while those rates have since come down, container costs are more to ship.” So, it costs more to ship still than before the pandemic. So, he wanted it to come down tremendously. I thought that was a crazy statement, but yeah, it’s just-

Daniel Creech: Am I wrong? Didn’t he say something about cloudy? Am I getting that?

Frank Curzio: Yeah, no, he says-

Daniel Creech: You made me look terrible.

Frank Curzio: Very, very cloudy out.

Daniel Creech: Okay. Very, very cloudy.

Frank Curzio: He says it’s clearly freight rates, but he said both decrease in demand and easing of supply chain congestion. So, you’re seeing the easing of supply chain congestion. So, when companies say that, be careful. We track this stuff. A little bit in auto still, but a lot of industries have freed up. You could ship. They’ve freed up. And so, if they’re using that and say, “Well it’s because of supply chain concerns.” It’s not supply chain concerns. It’s inflation, it’s higher costs, higher input costs. But that’s not one of them, so again, we have about 65%, I think 70% of companies reported. Still a lot more to go. We’ll be covering. We’ll definitely cover some tomorrow. I think MGM reports after the bell. But let’s see what the Fed says. We’ll cover it tomorrow, and yeah, I mean, look…

Daniel Creech: So, I get to come back on a Thursday, huh? What a week.

Frank Curzio: I want to cover this on a Thursday. So yeah, I’m not going to have a guest on, because I would like for you and I to cover this. I think we say this a lot, that this is one forecast that I hope I’m wrong on. And I mean it. I know a lot of us are long, I don’t want to see this crazy hard landing where we have companies going bankrupt and just poverty and… I mean, you think it’s bad here. You got to see overseas how bad it’s right now. I mean, it’s the debt GDP is so much higher than ours.

Frank Curzio: Rates are really, really crushing them. That’s why the dollar continues to go high and stay high. Certain profits for a lot of these S&P 500 companies have operations internationally. But this is one forecast that I do hope that I’m not right on, but it’s hard to see how you’re not going to see stocks come down, equities come down, when the Fed is clearly destroying demand and not going to be there to save you this time. So again, maybe there’s a solution here. Maybe inflation comes down all of a sudden. I don’t know. I don’t see it. We haven’t seen it, but let’s see what the Fed says, and we’ll analyze it tomorrow, right?

Daniel Creech: Yeah. Go over it. And a handful of earnings, some companies reported earnings, and I have a lot to say about it, Frank. So, stay tuned.

Frank Curzio: And we’ll tease it, because one of the things you wanted to cover was in our portfolio, right?

Daniel Creech: Yeah, a couple.

Frank Curzio: Couple. And it’s good because what they said last week-

Daniel Creech: Coal. Speaking Of Christmas coming up, basically it’s Christmas now. Once Halloween’s over, everybody starts with Christmas. I don’t understand that. Everybody forgot about Thanksgiving, I guess.

Frank Curzio: Everything’s out there. Yeah.

Daniel Creech: Terrible.

Frank Curzio: Yeah, no worries.

Daniel Creech: Yes, but anyway, coal, not coal in your stockings. What’s another pun there? We could say coal about cash in your account or something.

Frank Curzio: Coal’s on fire right now. How’s that sound?

Daniel Creech: All right, that’s a wrap.

Frank Curzio: It’s funny, but it’s, I mean, the market is booming. They’re not allowed to say it. No one’s ever allowed talk about coal, but man, when you hear what large coal-

Daniel Creech: Believe it or not, people we put time into this.

Frank Curzio: Coal is saying, yeah, that script, what Arch Coal is saying, you’re going to be like what I needed. The dividends are like massive special dividends. Again, they can’t say it because coal’s going to destroy the world, and it’s terrible, and we have to get off coal. But man, right now, nothing else working really. And you’re seeing coal up. We’ll cover that one in another company in our portfolio too, which you’ll see the difference in what they’re saying last quarter compared to this quarter. We keep seeing that. And it’s just tone that’s changing, it’s going to continue to change, but we’ll cover that tomorrow. Good luck with the Fed today, and let’s see what they say. We’ll break that down tomorrow. Sound good?

Daniel Creech: Cheers.

Frank Curzio: All right, man. Take care, guys. And I’ll see you in a little while.

Announcer: Wall Street Unplugged is produced by Curzio Research, one of the most respected financial media companies in the industry. The information presented on Wall Street Unplugged is the opinion of its host and guests. You should not base your investment decisions solely on this broadcast. Remember, it’s your money and your responsibility.

Frank Curzio
Frank Curzio, founder and CEO of Curzio Research, is one of America’s most respected stock experts. His research is regularly featured on media outlets like CNBC’s Kudlow Report, The Call, CNN Radio, ABC News, and Fox Business News. His Wall Street Unplugged podcast—ranked the No. 1 “most listened-to” financial podcast on iTunes—has been downloaded over 12 million times.
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