The Capitalist Investor - Episode 137

Do you believe in coincidences? How attached are you to textbook definitions? This week, Derek, Luke, and Tony talk about politicians and corporations buying time – or perhaps pitching lies. As we approach the second quarter GDP reading, the White House quickly adjusted the concrete definition of a recession to soften the administration’s blow, meanwhile companies are holding back a bit of the blunt truth on their earnings calls. The guys also touch a bit on the latest insider trading hint in the House of Representatives and Nancy Pelosi’s husband’s stock buying game. Episode #137 of “The Capitalist Investor,” is about calling out the nonsense unfolding from those we should all hold accountable. 

Outline of this Episode:

  • [2:00] Recession; defined as…
  • [10:50] Earning season visions
  • [16:35] Insider Trading on Capitol Hill

The White House vs. Webster’s Dictionary

As we have all been taught, a recession is defined by a period of temporary economic decline in which GDP – trade and industrial activity – is negative for two consecutive quarters. Or in relation to recent news coming from the White House, was defined as. 

This past week, the White House stipulated that everything from Economics 101 can be thrown out and that a recession is not defined by two negative quarters of GDP. Instead, they said a recession must be defined holistically, looking at the overall picture of the economy instead. 

But our definition still stands despite the White House trying to defend itself against the reality of impending recession headlines. It doesn’t surprise us at all that they would try to rearrange the meaning of a recession – we knew it was coming. 

The way we look at it is we are in a recession. Although we haven’t heard the technical announcement yet, it could come at the end of this week when the second quarter GDP reading is announced. 

Whether it’s negative or not – our economy is still in trouble. More and more people can’t afford household expenses. Wages cannot keep up with surging prices. When wages are going up less than the rate of inflation, spending will continue to get cut. And when it does, it’s going to cut in GDP since 70 percent of our GDP is based on the things we spend on. 

Maybe the White House’s definition change is based on the argument that generally, recessions differ throughout history and different things happened every time we were in one. Sure, the labor market is still holding on, but still, the definition of a recession is what it always has been: a two-quarter decline in GDP. 

How will the market react based on the Fed’s anticipated actions?

Let’s say somehow, there’s a positive reading tomorrow and, we aren’t technically in a recession – what does that tell the Federal Reserve? 

Our prediction is that it would tell them we have a lot of leeway, some room, and motivation to continue to hike interest rates aggressively to cool down the demand of the economy. 

On the other hand, if we get a negative reading, the Fed may lessen interest rate hikes or lower them again. That could cause the market to blow up and increase significantly because obviously everyone is looking for that. It would mean that demand is falling, people are spending less, and feeling the pain. 

But the reaction to lessening interest rates will only be surface level good news. If you read between the lines, what it really means is that the economy isn’t strong enough. They would be slowing down because they hiked too far, too quickly, and we couldn’t handle that. 

No matter what the Fed does, it’s hard to predict the outcomes and even harder to feel great about them. It’s almost a lose-lose situation. In all cases, the band-aid will be ripped off, and we all know that always hurts. 

Are companies just trying to buy time in their earnings calls?

We can talk about formal and technical definitions all we want, but after this week’s earnings reports, it’s hard to ignore the fact that some businesses are struggling and preparing for what’s to come. 

Walmart recently reported that they are missing their revenue goals and taking some of the optimism off the table. It makes sense though. The majority of Walmart spenders are middle to lower class Americans – the people who are directly feeling most of the pain right now and struggling to make ends meet. Walmart is where they go to buy all their household necessities and food – they can’t afford to take a trip down discretionary aisles. The company’s earnings are just reflecting that.  

Earnings tell us a lot. But what’s most frustrating is all the head-fakes and reactions that people often jump to and get ahead of themselves with. 
Tech companies like Microsoft and Google also shared their reports, and even those companies missed their top and bottom lines and billions in revenue. But still, they continue to guide their earnings up for the future and hold optimistic beliefs. 

But that can get ugly for them, the same way that guiding down would do. Setting high or low bars for earnings can drive the market to act drastically. Companies need to stick to the middle ground and remain balanced. They need to be honest about the visions they foresee without moving people towards a crash or without attempting to buy time and make up for their losses. 

Overall, what the market needs is time to re-regulate without interference. The free market works best when it works on its own to sift through the clutter.

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