The Fed may be about to crash the plane, but the focus should be on profits

By Dustin Moskovitz On Jul 31, 2023

Consider the role of the strategist in modern-day portfolio management. Her primary goal is to figure out if the Federal Reserve is going to stop raising interest rates . She has to try to figure out why the longer end of the yield curve is predicting a recession. Given what the yield is saying — that we have to have a recession — can the Fed avoid a downturn given its limited tools and the inability to slow what seems to be a runaway economy? No matter what the Fed seems to do, it’s become a game of whack-a-mole — whether it be wages, home prices, creeping commodities, or Fed subsidies that are about to roar in. The combination of incipient re-inflation led by a housing market that goes up in price, not down, as mortgage rates go higher, seems as strong as the possibility for deflation. The idea that the Fed is driving the price of a house to further unaffordability has taken hold. It’s a nightmare. The economy is too strong to be on the verge of a recession. But the Fed knows that, too, so there’s no reason for it to relent. The truly intractable part of the moment? The yield curve can’t be wrong, so it remains a matter of time before Fed Chair Jerome Powell crashes the plane — and let’s not forget that lurking, lurking election. And what’s the job of the equity analyst in all this? Let’s take the role of the person who covers Club name Procter & Gamble (PG). What does she see? How about a company that has used ingenuity; an amazing balance sheet ; clever marketing; an excellent-go-to-market strategy globally; and incredible innovation to grow, take market share and increase regimen? She sees a company that has had to lower prices in three out of 51 quarters, so the price increases that have been put through will most likely stick. About 50% of the profits of this company were wiped out by commodities, transportation and foreign exchange headwinds, yet P & G still grew operating margins by 310 basis points and delivered 7% organic sales growth, while returning an insane amount of money to shareholders. The strategist and the analyst, in short, are looking at two very different animals. One is looking at gross domestic product and the cost of a basket of goods and services, looking at a system that is in some sort of danger of creating an incipient, inflation-plagued Weimar Republic. The other is looking at companies and seeing how the biggest ones are performing versus benchmarks. The strategist must make big bold calls — all the bolder if on air. She is stuck playing a game that doesn’t give her the flexibility to think that anything has changed. So she extends her irrelevance as prices go higher. The market isn’t giving her a chance to change. Why did P & G-and so many others have great quarters so far this earnings season? Because they almost all raised prices for everything. At the same time, so many companies like P & G figured out how to take out billions of dollars in all sorts of suddenly exposed costs. The fat on the bone had grown immensely since the Great Recession — and there it was, ripe for the butchering. For almost all companies. So, the strategist can’t factor in the real world beyond Jerome Powell and some percentages next to a few barely relevant lines: the 20-year Treasury , the consumer price index and U.S. employment data. But the equity analyst knows the truth. The price-to-equity ratio on dynamic capitalism is growing bigger. It turned out to be a triumph of imagination, invention, go-to-market strategies, use of the media, and a lack of disrupters — all disrupted by Covid-19. That strategist was so busy looking at the discount rate on the bogus cash flow number, the binary nature of hard or soft landing, and the shape of the curve that she forgot the single most important part of our business: profits, which are going up, not down, because the managers are better than history gives them credit. And the multiple on those profits is going up not because of hideous expansion, but because of a triumph over the pandemic. We just didn’t know it until now. (See here for a full list of the stocks in Jim Cramer’s Charitable Trust.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

Jerome Powell, chairman of the US Federal Reserve, during a news conference following a Federal Open Market Committee (FOMC) meeting in Washington, DC, US, on Wednesday, July 26, 2023.

Al Drago | Bloomberg | Getty Images

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