by Bryan Perry

March 22, 2022

“Flourish: To grow or develop in a healthy or vigorous way, especially as the result of a particularly favorable environment.” – Dictionary definition of “flourish”

Following last week’s FOMC meeting, Fed Chairman Jerome Powell held his press conference, where his answer to the first question provided the spark that lit the fire under the market that carried the rally right into the Friday’s closing bell. To be clear, words matter, and Powell chose his words carefully.

What was the question, and Powell’s answer? Jeanna Smialek of The New York Times led off the Q&A, by asking Powell his thoughts on the Fed moving too aggressively and risking a recession, or going to slowly, thereby allowing inflation to become fully embedded with the Fed falling even farther behind the curve. Within the body of Powell’s response, it was the following statement that triggered the rally.

“And so, all signs are that this is a strong economy and, indeed, one that will be able to flourish, not to say withstand, but certainly flourish as well, in the face of less accommodative monetary policy. The American economy is very strong and well positioned to handle tighter monetary policy.”

From the Summary of Economic Projections release by the Fed following the FOMC meeting, the table below has the Fed forecasting inflation ending the year at 4.3% with the December reading coming in at just 2.6%, and 2023 showing an annual inflation rate of just 2.7%. Taking into account the current high inflationary conditions, these projections seem more akin to fairy dust than reliable forecasting.

Federal Reserve Economic Projections Table

To get to these Goldilocks numbers, pretty much everything has to be right with the world, and nothing could go badly wrong. It’s amazing what the market finally gloms onto in search of any reason to ignite a broad-based buy program in a market that is technically oversold, but not necessarily fundamentally so.

However, a revisit of the introduction to the FOMC statement shows a heightened level of uncertainty that acknowledges the depth of the risks to their optimism. Within the FOMC statement:

The invasion of Ukraine by Russia is causing tremendous human and economic hardship. The implications for the U.S. economy are highly uncertain, but in the near term the invasion and related events are likely to create additional upward pressure on inflation and weigh on economic activity. With appropriate firming in the stance of monetary policy, the Committee expects inflation to return to its 2 percent objective and the labor market to remain strong.”

In his press conference, Powell added to that printed statement:

“Inflation is likely to take longer to return to our price stability goal than previously expected. Inflation remains well above our longer-run goal of 2 percent. Aggregate demand is strong, and bottlenecks and supply constraints are limiting how quickly production can respond. These supply disruptions have been larger and longer lasting than anticipated, exacerbated by waves of the virus here and abroad, and price pressures have spread to a broader range of goods and services.”

Additionally, higher energy prices are driving up overall inflation. The surge in prices of crude oil and other commodities that resulted from Russia’s invasion of Ukraine will put additional upward pressure on near-term inflation here at home. So, this prediction of inflation declining to 2.7% by year-end is, in my opinion, not rooted in reality. The global supply chain constraints for Chinese-made goods have worsened with the lockdown of 50 million people in the high-tech city of Shenzhen and surrounding regions.

The lockdown is supposed to last only one week, but according to Dr. Scott Gottlieb, the renewed spread is due in part to the limited effectiveness of the vaccines that China has deployed against the BA.2 omicron variant. “They didn’t use the time that they bought themselves to really put in place measures that would prevent omicron from spreading,” he told CNBC.

The war in Ukraine is taking on the look and feel of Russia digging in for a prolonged siege on Kyiv and other key cities. Ukraine is the breadbasket of Europe and accounts for roughly 10% of the global wheat and 16% of the global corn market. If you add in Russia, wheat exports are 30%. Russia is also the world’s largest producer of barley, sugar beet, and the third largest global producer of potatoes.

Wheat Price (Usd/bul) Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Corn Price (Usd/bul) Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

The indefinite cutting off of Russian oil by western nations will have long-term effects on gas, diesel, jet fuel, lubricants, and all petroleum-based products found in just about every industry. China will serve as the main recipient of Russian oil, but Europe could freeze this coming winter without Russian natural gas. To this point, U.S. exports to Europe for natural gas are a very attractive investment theme for 2022.

WTI crude is back up to around $105 per barrel, after a brief pullback on hopes of a cease fire, but it was reported by The Wall Street Journal that Russian President Vladimir Putin said he will continue the war in Ukraine until the end. Additionally, President Biden’s phone call with President Xi was not successful. China did not condemn the invasion and did not promise they would not undercut sanctions on Russia.

In addition, the Journal reported on March 8 that the “Saudis have signaled that their relationship with Washington has deteriorated under the Biden administration, and they want more support for their intervention in Yemen’s civil war, help with their own civilian nuclear program as Iran’s moves ahead, and legal immunity for Prince Mohammed in the U.S.”

The Saudis aren’t picking up the phone calls from DC, and that’s a problem for the future of oil prices.

Gas prices on a national level closed last Friday at $4.25 per gallon and could well exceed $5 if there are any disruptions at refineries and/or the free flow of global oil shipments.

Oil Price (Usd/bar) Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Jerome Powell and the Fed are effectively painted into a corner. They appear to be in denial of a siege of inflation that will run hotter and longer than they want to admit, and if they raise rates too high, they imperil the national debt. The finance charge on the $30 trillion owed by the government is about 1.6% according to the Congressional Budget Office (CBO). For every 1% that finance charge rises, it raises the cost of interest by $300 billion per year. At 5%, that would add another $1 trillion in interest every year.

Mr. Powell’s favorite word used to be “transient,” and the market trusted him and rallied to new all-time highs. Today, his new favorite word is “flourish,” and the market fell in love with it last week as well.

In the movie “Margin Call,” about the collapse of Lehman Brothers, senior risk manager Eric Dale is fired and as the elevator door is about to close, he hands risk analyst Peter Sullivan a USB memory stick, says he was working on something, and urges him to “be careful.” The rest is history.

I think going forward, given the current variables at work, investors should be careful about taking Fed Chair Jerome Powell at his word – even if the word is as welcome as the world “flourish.”

All content above represents the opinion of Bryan Perry of Navellier & Associates, Inc.

Please see important disclosures below.

Also In This Issue

A Look Ahead by Louis Navellier
Putin Seems Overextended, Frustrated, and “Ready to Deal”

Income Mail by Bryan Perry
One Word Triggered the Recent Rally

Growth Mail by Gary Alexander
Will Global Growth Grind to a Halt?

Global Mail by Ivan Martchev
The Yield Curve – Only 17 Basis Points to Zero

Sector Spotlight by Jason Bodner
Big Money is Buying Again – Can it Last?

View Full Archive
Read Past Issues Here

About The Author

Bryan Perry

Bryan Perry

Bryan Perry is a Senior Director with Navellier Private Client Group, advising and facilitating high net worth investors in the pursuit of their financial goals.

Bryan’s financial services career spanning the past three decades includes over 20 years of wealth management experience with Wall Street firms that include Bear Stearns, Lehman Brothers and Paine Webber, working with both retail and institutional clients. Bryan earned a B.A. in Political Science from Virginia Polytechnic Institute & State University and currently holds a Series 65 license. All content of “Income Mail” represents the opinion of Bryan Perry

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