TPHD - Why We May Be In An Era Of Higher Rates For Longer
2023-08-01 04:12:00 ET
Summary
- Why the Fed might not be done with rates.
- Will rates return to low levels once inflation cools?
- Why can't the Fed seem to cool the economy? Strong jobs market.
The U.S. Federal Reserve hiked interest rates to a 22-year high and left the door open for more. Phil Davis, Founder of Philstockworld.com, tells Kim Parlee why he thinks the Fed is unlikely to be in a rush to lower rates even after inflation cools.
Transcript
Kim Parlee: The US Federal Reserve has once again raised its benchmark overnight rate by 25 basis points, taking it to between 5.25% and 5.5%. That is the highest level in 22 years. Now, the Fed has left the door open for more rate hikes down the road.
So how high will they go? And what are the implications for the market? Those are just a few of the things we're going to be discussing over the next half hour with Phil Davis, Founder of Philstockworld.com.
Phil, always great to see you. I'm thrilled we actually have a good 30 minutes with you today. So let's start off with just your reaction to the Fed rate decision. It was priced in. Is there anything that came out that was surprising? And do you still think there's more to go?
Phil Davis: I think there's absolutely more to go. I think that's why the markets kind of took a little nosedive toward the close. It wasn't so much the statement as what Powell was saying afterwards when they were interviewing him -- not interviewing him, he had a press conference -- and he's just basically saying, look, this fight isn't done. We're nowhere near 2%, which is true for inflation. And until we get there, we're not going to be satisfied.
And they're almost certainly going to do another 0.25%, I think maybe one more besides that. We'll be right about 6%, which is where we always said it was going to be as far as the Fed funds. And they'll keep that until they see inflation calming down.
Kim Parlee: How long do you think that'll be?
Phil Davis: It'll be a long time. That's the other thing people are not happy about because it's not going to bounce right back. In fact, I was writing today in our newsletter -- people think that the normal Fed funds rate should be 3%, or 2%, or something like that because it's been that way for 20 years, basically. And the reality is, though, if you look historically, it's more like 4.5%.
4.5% to 5% is the normal Fed funds rate. They're not going to run back to what we do in emergencies right after inflation is even a little bit calmer. It's not going to happen.
Kim Parlee: So, given that, tell me what that sustained level, whether it's 5%, or 6%, or somewhere in that area, is going to do in the economy and the market? Because right now, I think the S&P is trading around 30 times earnings. So what does that mean long term?
Phil Davis: Well, they can't kill this economy right now. It just keeps going and keeps going. It's like the Fed has been trying to knock the economy down. They want a recession or something basically flat that'll take the steam out of inflation.
But the problem is we still have 9 million unfilled jobs in America. And aside from that, there's a huge amount of wage pressure. You hear about all these strikes going on or potential strikes. They just settled UPS ( UPS ), thank god. That would have been a disaster.
But people need more money to live. And until you equalize the wages with what inflation has already been, it's not going to stop. There's still going to be that inflationary pressure coming from wages on up.
Kim Parlee: What do you think is driving all the job growth? I mean, we have some very specific things -- I know in Canada, we're seeing a big population growth in immigration, which is really driving a lot of population growth and jobs here. But what is it, do you think, that's driving all the demand that we're seeing for jobs in the States right now?
Phil Davis: Well, lack of supply. I mean, we used to have a million, 2 million immigrants coming in every year. They've basically put a stop to that. It's very small amount now comparatively. 1 million people died during COVID.
We forget that it has not been a good couple of years. And then people who have long COVID have backed out of the workforce. There are a lot of people who have lasting symptoms of COVID -- I mean, millions. And they've taken early retirement and they've also stopped.
And low population growth is another problem. And you're talking about, we act like this is just like a one-year problem -- this has been building and building for before COVID, since 2019. So we've had four years of this building up. And if you miss a million people a year for four years, all of a sudden you're short 4 million workers.
Kim Parlee: And then I guess you add on top of that some new demand. We look at AI and what AI is doing to the stock market. There's a lot of hype. We'll have to see if it actually plays out longer term, but there's new demand for more specialized skills that don't exist at the same time.
Phil Davis: Well, yeah, there's a huge skills mismatch also. And that's not helped by a two-year gap in education. People don't want to call it a gap, but kids working on a remote monitor for two years of their schooling, for 10% of their school career, is not a good thing. And you can see it in the plummeting test scores. And meanwhile, companies still need qualified workers to come out of college.
Kim Parlee: Let me ask you, though -- so that's what's happening fundamentally with the economy as you see it. When you look at the market, AI is booming, the NASDAQ way up. Are we in bubble territory, do you think?
Phil Davis: I think we are a little bit. Last week in our webinar, we did a study, and if you look at the S&P 500, there are only about 10 stocks - Microsoft ( MSFT ), Amazon ( AMZN ), Apple ( AAPL ), IBM ( IBM ) - that are providers of AI, that own AI systems and sell them to others, right? There are people collecting money for AI.
Everyone else is a user. 490 S&P 500 companies are consumers of AI. They're spending money to implement AI just to be on an even level with their competition. So it's a productivity enhancer, yes, but it's also basically an expense. It's like having to subscribe to new channels, right? One time we sold everybody the internet -- you have to have the internet to be competitive. Now, you have to have AI to be competitive.
Kim Parlee: I guess the thought, though, is from a company standpoint, they invest in AI, but they get some productivity -- maybe there are some other trade-offs along the line. But we'll see. I get your point with the internet -- that did not happen in the long term. Can I ask you, when you look at the markets, are you expecting a pullback? If you are, how much? And are you expecting a rotation into value?
Phil Davis: Well, I hope we get a rotation to value. That's how we invest. We're value investors. It's been a little bit disappointing this year, frankly, considering the amount of the rally, but we've been in fairly cautious stocks. We haven't been chasing anything.
We certainly haven't been playing into the 30 times, 40 times AI plays. But I think, again, it's bubbly. If you look at Microsoft today, they got a lukewarm reception to their earnings. You can't live up to the hype. The hype is crazy.
Just like in the dot-com days, you couldn't live up to the hype. People were paying insane amounts of money for stocks. But when they look at the earnings, they're like, well, where's all this magical internet money? And it's just not really there.
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Why We May Be In An Era Of Higher Rates For Longer