Financial Focus: Does anyone know what’s going on?

By Michael E. Russell

Michael E. Russell

The state of our economy reminds me of the skit made by Bud Abbott and Lou Costello in the 1950s. Who’s first, what’s second, I don’t know who’s third! What a mess!

Treasury Secretary Janet Yellen admits to a series of mistakes made by her department and the Federal Reserve. President Biden is now going to Saudi Arabia to ask them to pump more oil while shutting down our own pipelines. I find it hard to believe that inflation is only up 8.6% year over year, a stat released by the Fed. Gasoline at the pump is up 60%, meat up 62%, vegetables up 55%, air travel up 34%; I just don’t understand.

I feel like a grandparent trying to help the kids with their math homework. I find it somewhat confusing that 2 + 2 no longer equals 4, etc., etc. I guess our kids are all going to become economists and work for the Federal Reserve.

I don’t want to be the bearer of bad news, but I think a reality check would be in order. I will use the Federal Reserve number even though it excludes food and lodging. Really! On inflation, there can be no dispute. Friday’s report that consumer prices rose to their highest level in 40 years shouldn’t come as a surprise. Reports from the University of Michigan Consumer Confidence Survey showed the most pessimistic sentiment on record, driven mainly by a historically low unemployment rate and soaring prices.

It appears that notes from the Federal Open Market Committee (FOMC) indicate that Fed Chairman Jerome Powell intends to hike rates by half a percent this month and again in July. Futures also point to another 0.5% increase in September.

The change in attitude at the FOMC since March is extremely troubling. The inflation figures took them completely by surprise. Why didn’t they just ask people who were filling up their gas tanks and buying food? They knew inflation was rampant. A few more statistics, because Washington DC is driving me crazy.

Larry Summers, who served as Treasury Secretary from 1999 to 2001, released an economic research paper last week. To quote: “In order to bring core CPI back into the 2% range, it would take the same extreme monetary restraint exercised by former Fed Chairman Paul Volcker that led to back-to-back recessions in the 1980s. Once again, there are plenty of smart people who have said the Fed is way behind the eight ball. Example: the former chief economist of Alliance Bernstein, Joseph Carson, has been shouting for more than a year: “The Federal Reserve is missing the boat”.

Let’s talk about stocks. Standard and Poor’s P/E fell from 21 to 16. This number, 16, is normally considered a reasonable P/E to buy stocks. However, if interest rates are still too low and earnings forecasts fall, don’t be surprised if the stock market is even more damaged. The market is down 10 over the last 11 weeks. I blame the Fed’s incompetence on inflation, as well as the war in Ukraine and the lasting effects of the pandemic.

What do we buy? Drugs! Not street drugs, but big pharmaceutical companies. The pandemic and the need to stay home and eat and eat and eat has made many of us fat. So, let’s look at the companies that manufacture insulin. Why? It manages blood sugar levels which helps in weight control. Eli Lilly (LLY) has just received FDA approval for Tirzepatide for diabetes, apparently with good results. Novo Nordick (NVO), a Danish company, is the world’s largest manufacturer of insulin. Novo’s obesity drug sales doubled year-over-year to $480 million. They predict a nine-fold increase in sales.

Some news that fell on the thread last week:

1. Twitter agreed to share data on fake accounts with Elon Musk, putting the $44 billion takeover back on track.

2. Jet Blue Airlines has increased its bid for Spirit Airlines.

3. Kohls is in talks to be bought by Franchise Group for $8 billion.

As our parents used to tell us, “If you don’t have anything good to say, stop talking”. On that note, please enjoy our wonderful weather. If any of our readers know how to keep geese out of the lawn and deer out of the garden, please let me know.

Michael E. Russell retired after 40 years working for various Wall Street firms. All recommendations made here are not guaranteed and may result in loss of capital. The opinions and investment recommendations expressed in the column are those of the author. TBR News Media does not endorse any specific investment advice and urges investors to consult their financial advisor.