3 things need to happen to keep the Fed on a slow path to hike rates

If you want to keep the Federal Reserve on a slow path to raising interest rates to a reasonable level – let’s call it 3.5% – we need to see three things:

  • Big layoffs by the thousands
  • A suspension of redemptions to preserve cash
  • Store closures and promotions that save an inflation-ridden middle-class consumer everywhere

We’re starting to see a smarter consumer spending less, both at the store and on vacation. The first is due to sky-high price increases in every aisle and the second is much more because airlines have made travel too unpredictable.

Now some of the causes of inflation are under control. Freight calms down. Parts are no longer available, but at higher prices. And while absenteeism is still a problem, it’s slowly becoming less of a problem.

Price increases always seem inevitable. It’s almost as if every company is imposing higher costs on consumers, but none seem to have prepared for the price increases except Costco (COST), which shows you why their performance is so strong. I’m afraid it will take a Department of Justice case against a producer group to demonstrate some kind of price fixing, but those cases are hard to win, let alone bear. Nevertheless, there seems to be a lot of gouges.

But this is all a different phase of the Fed’s fight. It appears to have gained on most commodities, including food, so I could see that 75 basis point rate increases might not be on the table. We may learn more when Jerome Powell speaks at the annual Fed rally in Jackson Hole later this week.

We are now on the more intractable side – wages, rent and food – and those are really hard to beat for a Fed with its blunt instruments.

But beat him, Powell and his team have to, and we’ll find out how they do by looking at some panels.

The first concerns layoffs. We need to see companies cut jobs to become more profitable or to stay in business. The first will have to be companies trying to adapt to the shortest consumer, the one no longer supercharged by the federal government’s stimulus measures. I would say that retailers and restaurants risk laying off staff. If you listen to, for example, Kohl’s (KSS) recent earnings call, you will be flabbergasted to learn how sacrosanct the dividend is. In the meantime, the retailer’s cash position is about as low as I’ve ever seen it. Now they had excuses for that on the call, but I can’t say I bought them, especially after the accelerated buyout left them so high and dry. Why the hell were they using their money to buy back stocks?

But you might ask the same about Bed Bath & Beyond (BBBY). Its endless takeover has now left the company in dire straits. Talk about self-inflicted wounds. How many of these stores are profitable? If not, can redemptions be justified? More and more companies are having to put their buyback programs on hold to conserve much-needed cash.

More cuts are coming because the environment is going to get tougher. Do automakers need all these people if they want to oppose Tesla (TSLA) CEO Elon Musk with electric cars that require fewer parts and fewer people to produce? This could reverberate all the way up the food chain. Can oil and gas companies keep all their workers if they have to reduce their emissions?

Can meta platforms (META) make it work with so many of their employees who are not in the metaverse, but the boss is deep in? Should Alphabet (GOOGL) replace someone? Why would the number of people laid off at Amazon (AMZN) stop at 100,000?

But the hardest part will be special purpose acquisition companies (SPACs) and recent IPOs. Take a look at Wheels Up (UP). A year ago, this company raised $650 million. Now it has around $400 million in the bank and a market capitalization of $562 million. How long can a luxury private jet company last? I know members are betting on Weber (WEBR), but have they looked at the grill maker’s track record? Almost no cash and $1.3 billion in debt. This is what happens when you force a deal by reducing the shares and the price. Wayfair (W) is cutting 5% of its workforce, but does anyone remember how poorly this business was performing before Covid?

We also need to see more closures. Why do so many chains need so many stores when stores are prone to increased theft? No, this time there’s no Sears. No JCPenney. But I would expect more mall closures if business doesn’t pick up, because we still have too many stores.

Go listen to Estee Lauder’s (EL) recent quarterly earnings call if you want to know what the future holds. They are closing 250 unprofitable stores and cutting 2,500 to 3,000 positions worldwide. Or watch what the brilliant Mary Dillon does with Footlocker to scale this operation. (The shoe retailer named the former Ulta Beauty chief as CEO on Friday.)

The economic boom spurred by the federal government during the pandemic has given us too many jobs and infrastructure jobs will not compensate for them. But that’s a tough question, because by any measure the economy only turned different two months ago. As he settles in, the layoffs will happen.

As the Fed gets back to work next month, we will hear that there is still work to be done, which means the labor market is still too strong. The only place where we really need more jobs is in the construction of multi-family houses. I just don’t understand why this isn’t happening. You’d think the big builders would get a feel for what’s really needed – expensive rentals – and make it happen. Instead, they rely on the scarcity of homes to keep prices incredibly high.

Today, we are witnessing trade-downs everywhere which should put pressure on the weakest brands. We know there are too many supermarkets, given what we see at Walmart (WMT) and Target (TGT), so we need to watch this cohort. Too many post-Covid pharmacies. Too many people run hotels after the success of Airbnb (ABNB). Too many restaurants because of DoorDash (DASH).

Walmart will certainly have to come up with more and better deals to get rid of its $1 billion worth of excess inventory. Other commercial declines: the incredible purchases on refrigerators and home entertainment on the Best Buy (BBY) site. In the meantime, I’m seeing FMCG branded products at Ollie’s (OLLI) and soon TJX at discounted prices.

Now, this part of the recession is very painful. Of course, the labor market can afford layoffs – at first. But if they come from recently publicized small-cap companies, they’ll be in the news all the time.

Without them, however, the Fed will have no choice but to keep raising the cost of money by selling bonds – which it has done very little – and raising rates, which it is doing. good.

Either way, you need some security here to go along with your old offense. Some Eli Lilly (LLY) to go with your Honeywell (HON), some Procter & Gamble (PG) to go with your Ford (F). Just know that earnings seasons will get tougher, not easier, from here for many industries. They will also be very good for a handful of others that we intend to present to you.

(Jim Cramer’s Charitable Trust is long AMZN, COST, F, GOOGL, HON, LLY, META, PG. View here for a complete stock list.)

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