When push comes to shove, Wall Street’s 1 per cent will always come first

EARLY Thursday morning our time the Fed delivered its expected ‘triple-sized’ 0.75 per cent official rate hike; then as we were turning off the lights, Netflix and Foxtel, that night, we got the news that the US was in recession – and Wall St cheered.

Between the Fed announcement and the close of trading Friday evening in New York, the Dow leapt almost exactly 1000 points.

Further, that came after a sustained rise in the Dow into the Fed announcement, making July the strongest month on Wall St since late 2020 when optimism had surged with the arrival of the Covid vaccines.

Over the month the Dow was up more than 2000 points or nearly 7 per cent, leaving it around 11 per cent below its all time peak reached at the very start of the year.

Our market went up more than 100 points over the two days, giving us a near 6 per cent rise for the month.

So, was it simply yet another example of ‘bad news is good news”? That’s to say, bad news for everyone else is good news for share traders and investors?

At core the answer’s yes; it’s also more complicated. Both are captured in the phrase ‘pre-emptive buckle’.

As I’ve argued over the years, the Fed – their version of our Reserve Bank – would always buckle if Wall St threw a tantrum. Since the famed, but grossly over-rated Fed head Alan Greenspan did it in the mid-1990s, the Fed has always made it clear that ultimately it ‘had Wall St’s back’. Or more precisely, their bonuses and their multimillion dollar apartments in Manhattan and their luxury estates on Long Island.

Yes the Fed might mostly try to aim for good economic outcomes for the country generally – the best combination possible of low inflation and sustained growth, jobs and real business activity across the 99 per cent of the country between Manhattan and LA.

But when the crunch came and it had to choose between the 99 per cent and the Wall St 1 per cent, since at least the 1990s it would always choose the 1 per cent.

There were two huge clues hiding in plain sight that Powell was a Greenspan not a Volcker.

That’s Paul Volcker, the

Fed head who took rates to 20 per cent at the end of the 1970s to really crush inflation – and essentially set the world up for the generally low inflation of the next 40 years.

Now, I must immediately say two things.

Today’s inflation is nothing like the roaring inflation of the 1970s; and because of changes in our financial system and our borrowings, much lower rates these days would be very punitive (and effective).

But, we are nowhere near there – effective anti-inflation interest rate levels – either here or on the other side of the Pacific.

First clue that the Fed would stop hiking too soon came in the actual decision.

Everyone agreed with the 0.75 per cent. There was no ‘hawk’ pressing for a full 1 per cent – despite the raised Fed rate at 2.25 per cent still being ludicrously too low compared with the 9 per cent inflation.

The bigger clue was in

Powell’s much more dovish comments at his press conference. He said that another big rate rise at the next meeting only “could” be appropriate; that the overall aim was for rates to rise to be only “moderately restrictive”.

That was ‘one hand clapping’ for Wall St, so to speak. The other was corporate profits.

In Australia we are starting the annual profit reporting season; in the US, it’s their June quarter reports. And the profits have generally been good, with some key bad ones like Walmart.

But generally companies have been riding the strong and importantly profitable economic mix of strong growth, being able to raise their prices, and wages while rising still doing so only moderately.

Individual share prices and the market overall are a combination of two things.

One, PE ratios – the share price as a multiple of profits. So higher profits means higher share prices.

Two, the comparison of PEs to interest rates – lower interest rates mean higher shares prices.

Very simply, higher profits mean higher share prices provided interest rates are not going up or at least not going up dramatically.

Powell’s pre-emptive buckle played perfectly, as if it was timed, into the higher profits generally being rolled out.

The ‘recession’ – the two successive quarters of negative growth in the US economy – was also perfectly timed to play into this.

The definition is a total nonsense. The two falls were in any case very marginal; the economy really went sideways after surging out of Covid.

But hey, nobody ever claimed the supposed “smartest guys in the room” were actually, well, really smart; just greedy.