Good morning from the sensational Piedmont.

And, of course, Happy Friday!

As Monday is Juneteenth, we have a long weekend.

As a result, I will run one of my older columns on Monday that gives away a free PDF of the condensed works of Hans-Hermann Hoppe.

Hopefully, you love them, and I will see you with another live column on Tuesday.

In the meantime, I must eat some crow.

Good friend and Daily Reckoning editor Brian Maher wrote that Jay Powell didn’t do enough to convince the markets that he would continue hiking.

Honestly, I thought Powell did enough.

But I’m clearly wrong.

If you look at Thursday stock markets, Mr. Market no longer believes JPow.

Mr. Market now thinks he is going to pause and then pivot.

This is an enormous problem and the principal reason I didn’t want him to skip at all.

The Recap

In Wednesday’s Rude, I warned the chairman to ensure his traders knew that a “skip” was not a pause. Because if they didn’t believe him, this market would rally to the moon.

Why is that bad?

Because if the market rallies to all-time highs, which looks increasingly likely, then the subsequent hikes could be particularly - and needlessly - painful.

Here’s what I wrote on Wednesday:

I’m sure he’s going for choice B, the skip.

But he must execute this step delicately but firmly.

Powell must say something like, “We’re giving the market a month to catch its breath, then we’re coming back in full force. So be careful. You’ve got six weeks to sort yourselves out. Until then, I’ll be quiet. But we’re going to hike in July, so price it in.”

Then the belief he’ll hike again will be credible.

We’re not out of the woods with inflation, either on the consumer or asset sides.

He knows that. That’s why I find it puzzling that he’s skipping.

But then again, the politics in the Eccles Building must be palpable.

In fact, this is why I didn’t want Powell to skip in the first place.

To be fair to the good chairman, he kind of did this.

But in Thursday’s Daily Reckoning, my friend Brian Maher wrote he wasn’t strong enough:

Did the chairman take aboard Mr. Ring’s counsel? Did he “execute this step delicately but firmly”?

He did not. His mummeries were delicate — yet his mummeries were not firm.

They were constituted not of granite but of goo:

“The skip — I shouldn’t call it a skip — the decision… I would almost say that the conditions that we need to see in place to get inflation down are coming into place… The things are in place that we need to see. But the process of that actually working on inflation is going to take some time.”

Ugh. Mr. Chairman, you should’ve called it a skip, dagnabbit!

After all, the market tanked on the initial move, then suddenly recovered.

What would happen on Thursday?

Thursday’s Reaction

Well, Mr. Maher was right. Powell wasn’t firm enough.

How do I know this?

Let me count the ways.

Stocks were up. In fact, all eleven sector ETFs of the S&P 500 were up.

Credit: StockCharts.com

Bonds were up. Gold was up, though silver was a sliver down.

Bitcoin and Ethereum were up. Oil and natural gas were up. Copper and corn were up.

Credit: StockCharts.com

You may recall the Everything Rally. We had a mini-one yesterday.

Wanna know why it happened?

It’s not that Powell didn’t tell them he had two more rate hikes in mind.

It’s that Mr. Market doesn’t believe the Chairman.

Despite what Chairman Pow says - which, incidentally, I think is the truth - Mr. Market is wilfully ignoring the chairman.

It’s outrageous. And it’s the reason why he shouldn’t have “skipped.”

What’s Next?

For the next few months, I’d say, “Back up the truck.”

Again, I don’t think this rally will last forever. But there’s no reason for the SPX not to hit 4,650.

I wouldn’t be surprised to see it challenge the all-time high of January 2022, which was 4,796.56.

In the above chart, there’s not much overhead supply above 4,500.

I can see a lot of shorts getting shaken out here and everyone getting on the bandwagon.

And then, Powell’s problem is obvious.

By the time the next meeting comes around at the end of July, neither consumer nor asset price inflation will be under control.

He’ll hike, as he intimated he would. Then, instead of the market falling from 4,200 or 4,300, it’ll start its descent from 4,600 or even 4,800.

He will cause more pain because he “skipped” this time. He’s got both eyes on consumer price inflation. But, really, he needs to keep one eye on the stock market.

Because the wealth effect dictates he must.

What’s the Wealth Effect?

The "wealth effect" occurs when individuals tend to increase their spending when perceiving themselves as wealthier. Various factors influence this perception of wealth, such as an increase in the value of their assets, including stocks, real estate, or other investments.

Generally, when people experience increased wealth, they often feel more financially secure and optimistic about their future. This positive sentiment leads them to spend more money on goods and services. This stimulates economic growth.

The wealth effect is a crucial consumer spending component and a significant economic activity driver. It’s important to note that consumption is 70% of GDP, far higher than in other countries, where it averages 60% of GDP.

The wealth effect can be observed when the stock market experiences a prolonged growth period or a significant value increase. As stock prices rise, investors see the value of their investment portfolios increase. This increase in wealth can lead to a boost in consumer confidence and overall economic activity.

When people feel wealthier due to rising stock prices, they may be more inclined to spend money on discretionary items, such as luxury goods, vacations, or home improvements. This increased spending can positively impact businesses and the broader economy.

Additionally, as stock prices rise, it results in higher capital gains for investors, further contributing to the wealth effect and consumer spending.

However, it's important to note that the wealth effect can also work in the opposite direction. If the stock market experiences a significant decline, individuals may feel poorer, leading to a decrease in consumer spending. This can harm businesses and economic growth.

Here’s what I think will happen: we will be a happy bunch for the next six weeks. We’ll experience a positive mini-wealth effect-driven cycle. Inflation will increase, not decrease. The market will pop toward its all-time highs.

Then, Uncle Jay will take the punch bowl away.

Investors will hate him for doing it. And this will be his final undoing as Chairman.

Wrap Up

It’s clear that Jay Powell made a mistake. And this time, it will cost him.

What will that cost be? Most likely, his credibility as Chairman.

By skipping, he inadvertently signaled to the market he was pausing and then pivoting.

Mr. Market will take this new bull by the horns until the next hike, likely at the end of July.

Then, the reckoning will come.

In the meantime, enjoy your long weekend. I’ll raise a glass to you!