Do We Even Need The Federal Reserve?

On the Trey Ware this morning, Karl discussed the how investors are beginning to price in a recession and whether the Federal Reserve should be abolished.

Transcription:

Trey Ware:                         Let’s talk with Karl Eggerss from Eggersscapital.com about what to expect the holiday shopping season. Do we expect good things to be happening? We’ve got Cyber Monday today. We had Black Friday on Friday, and that looked like that went extremely well, so Karl, good morning to you. What do you think is going to happen over the coming weeks now? Are we set up for a very good holiday shopping season? What do you think?

Karl Eggerss:                      I think we are. We had all the tax cuts go through, and obviously employment is really good right now. We’re at pretty much full employment, so it should be a good holiday season. The term Black Friday obviously means that these companies are trying to get as many sales in as possible so that they get into the “black” for this fiscal year, and we really need that right now because the economy is starting, or excuse me, the stock market and investors are starting to try to price in a recession. That’s what the market is telling you, and again, as we talked about, I don’t think one’s coming any time soon, but it’s pricing one in.

Karl Eggerss:                      What’s going to happen is Wall Street is essentially saying prove it to me. Prove that the economy is still as good as it was six months ago, and these retail sales and the holiday shopping season is going to be a big contributor to that. If it’s good, and obviously all these retailers come with good news, good profits, then we can say that the consumer is still in good shape, because remember, Trey, the consumer, our listeners, are two-thirds of the economy. In other words, what they do directly impacts how good our overall economy is. It’s really important.

Trey Ware:                         Yeah. When you say the market is pricing in a recession, how are they doing that? We saw the stock market go down all last week with big drops last week. How are they pricing that in? Why does a pullback in the market price in a recession?

Karl Eggerss:                      Because really what it is, what we do every day is we monitor what is going on in terms of what things are still going up and what’s going down, and it’s very clear the very economically sensitive stocks, technology, semiconductors, retail, energy stocks, all those things-

Trey Ware:                         The FAANG.  The FAANG stocks.

Karl Eggerss:                      The FAANG stocks, exactly, and they’ve been hit the hardest, which they should be hit the hardest because they’re the most overpriced and loved.

Trey Ware:                         Mm-hmm (affirmative), right.

Karl Eggerss:                      And so they should be hit the hardest, but if you look at what’s going up right now, it’s the consumer staples. It’s the non-cyclical type stocks. In other words, the companies that don’t need a good economy to do okay because they don’t fluctuate as much in terms of their business. When you talk about laundry detergent, you talk about utility companies-

Trey Ware:                         Toilet paper, hand towels, the stuff you have to have, yeah, right.

Karl Eggerss:                      That’s right, and so that’s one of the things we look at is what are the companies that are doing well versus not, and the reason we look at that is because the stock market has the uncanny way of looking out into the future, so when we start to see things happening, it tells us are we missing something or is it pricing in, and that’s why I use the term pricing in. It’s investors are starting to shift their portfolios to reflect a future economy.

Trey Ware:                         Well, some people are saying that that’s what the Fed has been doing by going up on the interest rates that the President is not happy with. They’re trying to price in a future recession because they need some room to be able to do what they did last time, and as with QE whatever number it’s going to be coming up, rather than have to spend some money with the stocks and what have you to be able to rescue us from another recession if one does happen. They don’t have any wiggle room right now. They can’t go below zero, which is exactly where they had been, so they’re trying to give themselves some room if in the future they’ve got to cut rates to be able to stimulate the economy.

Karl Eggerss:                      Well, isn’t that silly. I mean, number one, we’ve got a little bit of room now, but isn’t that silly that the only reason they would be raising rates is so they can lower them in the future?

Trey Ware:                         Right.

Karl Eggerss:                      I had a high school student in here the other day who’s doing a senior thesis on should we abolish the Fed, and it begs the question do we even need the Federal Reserve because capitalism, supply and demand, is what can control interest rates over the long term. We don’t need the Fed because there is a lot of history that shows they go way overboard when they do this, and so at some point, yes, they will go overboard, and then what do they do? A few months later, they start to go in the opposite direction, and that is … we don’t need that-

Trey Ware:                         Well …

Karl Eggerss:                      And so it does beg the question do we even need the Federal Reserve at all?

Trey Ware:                         An unelected, unaccountable body of secretive people who we don’t even know basically who most of them are setting monetary policy for the entire nation, and by virtue of that, the entire world has just been kooky to me ever since they were developed on Jekyll Island. Thank you, sir. I appreciate your time. We’ll talk next week.

ICYMI: Saturday’s podcast “Is The Correction Almost Over?” can be heard by clicking here.

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