MARKET PERSPECTIVE

By J Mulraj

Aug 24-30

The Time Has Come, J. Powell Said, to Talk of One Thing – Interest Cut

In Lewis Carroll’s book, Through the Looking Glass’ the Walrus told the carpenter that the time had come to talk of many things.

Last week Fed Chair Jerome Powell stated that the time had come to talk, not of many things, but of one, viz. an interest rate cut. He has no domain knowledge of shoes, sealing wax,  cabbages or kings. His domain knowledge, of monetary policy and interest rate management, did, however, fail him in 2021, when he defined it as transitory. It’s lasted three years since.

Be that as it may, a recent admission by the US Labour department that it had overestimated job growth for the 12 month period to March ‘24 by a whopping 818,000, presenting a weaker economic picture than Powell had earlier assumed as accurate data, will likely spur him to announce a rate cut on Sep 17, at the next Fed meeting. A cut of 25 bips is expected, a larger one, though unlikely, would enthuse the market.

A larger cut, though, would trigger another round of unwinding of the Japanese carry trade, which had recently led to a collapse of global stock markets. So, Chair Powell may tread cautiously on Sep 17 in order to avoid having to reverse quickly. Like others, he, too, is averse to an egg splattered face.

The time has also come, whether or not the walrus or J. Powell says it, for the woke Biden/Harris Government, to become responsible about spending money. Look how crazy spending decisions have become in New York, a blue State.

In order to promote the use of wind power, the New York State has signed an agreement to pay two developers of offshore wind farms a whopping $ 155 and $ 146/ MWH, compared to the current rate of $ 36  (see ). If political leadership is so foolish, what can a Fed Chair do?

With barely 67 days left before the Nov 5 US Presidential elections, polls indicate it to be a close race between Democratic nominee Kamala Harris and Republican nominee Donald Trump. In order to appeal to voters, Harris has vowed to introduce, within 100 days, if elected, a ‘price gouging’ ban on food and  groceries and has also declared her intention to seize the patent of any pharma company which has been federally funded for R&D, if it doesn’t ’play by the rules’. Both threats are against the American system of free enterprise which has made it the world’s leading economy and the one with the most innovation.

One can’t help wondering if the two operators of offshore wind farms to supply power to New York were not, according to VP Kamala, guilty of price gouging, getting paid over 4X the prevailing rate, which the Biden Harris Government agreed to pay. Sure, they are not supplying food or groceries, her target areas. But, hey, will a 4X cost of energy not result in higher food and grocery cost?

One also wonders how long innovation will thrive under an administration that threatens to seize the reward (namely patents) if the innovator doesn’t play by its (ever changing) rules.

Is the A in USA being replaced by SR?

Corporate America will breathe a huge sigh of relief if Jerome Powell cuts interest rates by 25 bips or more, and indicates the start of a down cycle. The Commercial Real Estate sector is in crisis, one that could end up pulling down community banks. Some $929 b. of loans (20% of outstanding loans to the CRE sector) will mature in 2024 and a drop in interest rates will help.

So investors will be looking at the next Fed meeting, Sep 17-18. And then at the Nov 5 presidential elections results of the popular vote.  The winner of the popular vote need not, necessarily, be the elected President. He/she would be elected on the basis of electoral votes, needing 270 out of 538 to win. The States have to certify the results, which will be announced on Jan 6, 2025, when the Congress convenes a joint session.

So there’s a period of uncertainty ahead.

Last week the BSE Sensex rose 1279 points to end at 82391 .

In other news, PM Modi made trips to Ukraine, and to Poland, trying to patch together a peace proposal. He seems to be a rare political leader in pursuit of peace, amidst a pack of crazy ‘dogs of war’, in pursuit of conflict.

One would expect a somber assessment of its own financial condition to lead Ukranian President Volodymyr Zelensky to the negotiating table. As per this article (https://seekingalpha.com/article/4717843-wall-street-breakfast-debt-relief) Ukraine, which has raised international debt of $90 b. since the start of the war, seeks to raise more. It’s budget deficit is $45 b in 2024 and $35 b.in 2025. It may have to surrender territory captured by Russia as well as fertile land, one of the world’s most fertile, to lenders.

And the world will call it an ‘honourable’ peace deal with not a trace of bitter irony. The nations who encouraged the senseless conflict, led by the dogs of war, will feast on the carrion of a nation destroyed.

Their UN satiated hunger will lead them to instigate the next conflict, likely in the Middle East.

Perhaps mankind would be better off talking of sealing wax, cabbages and kings, and whether pigs have wings.

Picture Source: https://www.pinterest.com/pin/the-time-has-come-the-walrus-said-to-talk-of-many-things-of-shoes-and-ships-and-sealin–70579919149328031/

Comments may be sent to jmulraj@asiaconverge.com