Cramer: 3 things need to happen to keep the Fed on a slow course to raise rates - CNBC

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If you want to keep the Federal Reserve on a slow course to raise interest rates to a reasonable level — let's call it 3.5% — we need to see three things: Big layoffs in the thousands A suspension of buybacks to preserve cash Store closings and promotions that save a middle class consumer in the throes of inflation everywhere We are beginning to see a smarter consumer spending less, both at the store and on vacation. The former is because of the exorbitant price increases in every aisle and the latter is much more because the airlines have made traveling too unpredictable. Now some of the causes of inflation are getting tamed. Freight is getting calmer. Parts are more available, albeit at higher prices. And while absenteeism is still a problem, it is slowly becoming less of one. Price increases still seem inevitable. It's almost as if every company is pushing higher costs through to consumers, but none seem to have geared up for the price hikes except Costco (COST), which shows you why its performance is so solid. I do fear it will take a Justice Department case against a group of producers to demonstrate some sort of price fixing, but those cases are hard to win, let alone to bring. Nevertheless, there does seem to be plenty of gouging. But that's all a different phase of the Fed's fight. It seems to have won on most commodities, including foodstuff, so I could see that the 75 basis-point rate increases might be off the table. We might learn more when Jerome Powell speaks at the Fed's annual Jackson Hole gathering at the end of this week. Now we are on the more intractable side — wages and rents and food — and these are truly difficult for a Fed to beat with its blunt instruments. But beat it Powell and team must, and we will find out how they're doing by looking at certain signposts. The first is layoffs. We need to see companies cutting jobs to become more profitable or to stay in the game. The first will have to be companies that are trying to adjust to the more strapped consumer, the one who isn't turbocharged by the federal government stimulus anymore. I would say that the retailers and restaurants are likely to shed staff. If you listen, for instance, to the recent earnings call from Kohl's (KSS), you will be flabbergasted to hear about how the dividend is sacrosanct. In the meantime, the retailer's cash position is about as low as I have ever seen it. Now they had excuses for it on the call, but I can't say I bought them, especially after the accelerated buyback left them so high and dry. Why the heck were they using their money to buy back stock? But you could ask the same thing about Bed Bath & Beyond (BBBY). Its interminable buyback has now left the company in dire straits. Talk about self-inflicted wounds. How many of those stores are profitable? If they are not, can the buybacks be justified? More companies need to suspend their buyback programs to keep much-needed cash. More cuts are coming because the environment is going to get more harsh. Do the auto companies need all of those people if they are going to go against Tesla (TSLA) CEO Elon Musk with electric vehicles cars that require fewer parts and fewer people to produce? That could reverberate all the way up the food chain. Can the oil and gas companies keep all of their workers if they need to reduce emissions? Can Meta Platforms (META) make it work with so many of their employees not in the metaverse, but the boss is deeply ensconced? Does Alphabet (GOOGL) need to replace anyone? Why would the number of people being laid off at Amazon (AMZN) stop at 100,000? But the toughest will be the special purpose acquisition companies (SPACs) and the recent initial public offerings. Take a look at Wheels Up (UP). A year ago this company raised $650 million. Now it has about $400 million in the bank has a market cap of $562 million. How long can a deluxe private jet company last? I know that the memesters are betting on Weber (WEBR), but have they looked at the grill maker's balance sheet? Almost no cash and $1.3 billion in debt. That's what happens when you force a deal by cutting shares and price. Wayfair (W) is cutting 5% of its workforce, but does anyone remember how poorly that company was doing before Covid? We also need to see more closings. Why do so many chains need so many stores when the stores are subject to rising thefts? No, this time there are no Sears. No JCPenney. But I would expect more closures in the malls if business doesn't pick up as we still have too many stores. Go listen to the recent Estee Lauder (EL) quarterly earnings call if you want to know the future. They are closing 250 unprofitable stores and eliminating 2,500 to 3,000 positions globally. Or watch what the brilliant Mary Dillon does with Footlocker to right-size that operation. (The footwear retailer on Friday appointed the former Ulta Beauty head as CEO.) The economic boom spurred by the federal government during the pandemic gave us too many jobs and the infrastructure jobs will not make up for them. But this is a tough one, because by all measures the economy only became different two months ago. As it settles in, the layoffs will occur. As the Fed goes back to work next month, we are going to hear that there is more work to do, which means the job market is still too strong. The only place we actually need more jobs is in the building of multi-family homes. I simply do not understand why that is not happening. You would think that the large builders would get a handle on what is really needed — expensive rentals — and make it happen. Instead they are relying on scarcity of homes to keep pricing unfathomably high. Now we are seeing trade-downs everywhere which should put pressure on the weakest of brands. We know that there are too many supermarkets, given what we are seeing from Walmart (WMT) and Target (TGT), so we have to watch that cohort. Too many drugstores post-Covid. Too many people running hotels after the success of Airbnb (ABNB). Too many restaurants because of DoorDash (DASH). Walmart will certainly have to dole out more and better deals to get rid of its $1 billion worth of excess inventory. Other trade downs: the incredible buys on refrigerators and home entertainment on Best Buy's (BBY) site. In the meanwhile, I am seeing heavy consumer branded goods at Ollie's (OLLI) and soon TJX at marked-down prices. Now this part of the downturn is very painful. Sure the job market can afford the layoffs — at first. But if they come from thinly capitalized outfits that recently came public, they will be in the headlines constantly. Without them, though, the Fed will have nowhere to go but continuing to raise the cost of money by selling bonds — which it has done very little of — and raising rates, which it's well along doing. Either way, you need some safety here to go with your offense of old. 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 which we intend to present to you. (Jim Cramer's Charitable Trust is long AMZN, COST, F, GOOGL, HON, LLY, META, PG. See here for a full list of the stocks.) 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.

U.S. Federal Reserve Board Chairman Jerome Powell speaks during a news conference at the headquarters of the Federal Reserve, July 27, 2022 in Washington, DC.

Drew Angerer | Getty

If you want to keep the Federal Reserve on a slow course to raise interest rates to a reasonable level — let's call it 3.5% — we need to see three things:

Big layoffs in the thousands
A suspension of buybacks to preserve cash
Store closings and promotions that save a middle class consumer in the throes of inflation everywhere

We are beginning to see a smarter consumer spending less, both at the store and on vacation. The former is because of the exorbitant price increases in every aisle and the latter is much more because the airlines have made traveling too unpredictable.

Now some of the causes of inflation are getting tamed. Freight is getting calmer. Parts are more available, albeit at higher prices. And while absenteeism is still a problem, it is slowly becoming less of one.

Price increases still seem inevitable. It's almost as if every company is pushing higher costs through to consumers, but none seem to have geared up for the price hikes except Costco (COST), which shows you why its performance is so solid. I do fear it will take a Justice Department case against a group of producers to demonstrate some sort of price fixing, but those cases are hard to win, let alone to bring. Nevertheless, there does seem to be plenty of gouging.

But that's all a different phase of the Fed's fight. It seems to have won on most commodities, including foodstuff, so I could see that the 75 basis-point rate increases might be off the table. We might learn more when Jerome Powell speaks at the Fed's annual Jackson Hole gathering at the end of this week.

Now we are on the more intractable side — wages and rents and food — and these are truly difficult for a Fed to beat with its blunt instruments.

But beat it Powell and team must, and we will find out how they're doing by looking at certain signposts.

The first is layoffs. We need to see companies cutting jobs to become more profitable or to stay in the game. The first will have to be companies that are trying to adjust to the more strapped consumer, the one who isn't turbocharged by the federal government stimulus anymore. I would say that the retailers and restaurants are likely to shed staff. If you listen, for instance, to the recent earnings call from Kohl's (KSS), you will be flabbergasted to hear about how the dividend is sacrosanct. In the meantime, the retailer's cash position is about as low as I have ever seen it. Now they had excuses for it on the call, but I can't say I bought them, especially after the accelerated buyback left them so high and dry. Why the heck were they using their money to buy back stock?

But you could ask the same thing about Bed Bath & Beyond (BBBY). Its interminable buyback has now left the company in dire straits. Talk about self-inflicted wounds. How many of those stores are profitable? If they are not, can the buybacks be justified? More companies need to suspend their buyback programs to keep much-needed cash.

More cuts are coming because the environment is going to get more harsh. Do the auto companies need all of those people if they are going to go against Tesla (TSLA) CEO Elon Musk with electric vehicles cars that require fewer parts and fewer people to produce? That could reverberate all the way up the food chain. Can the oil and gas companies keep all of their workers if they need to reduce emissions?

Can Meta Platforms (META) make it work with so many of their employees not in the metaverse, but the boss is deeply ensconced? Does Alphabet (GOOGL) need to replace anyone? Why would the number of people being laid off at Amazon (AMZN) stop at 100,000?

But the toughest will be the special purpose acquisition companies (SPACs) and the recent initial public offerings. Take a look at Wheels Up (UP). A year ago this company raised $650 million. Now it has about $400 million in the bank has a market cap of $562 million. How long can a deluxe private jet company last? I know that the memesters are betting on Weber (WEBR), but have they looked at the grill maker's balance sheet? Almost no cash and $1.3 billion in debt. That's what happens when you force a deal by cutting shares and price. Wayfair (W) is cutting 5% of its workforce, but does anyone remember how poorly that company was doing before Covid?

We also need to see more closings. Why do so many chains need so many stores when the stores are subject to rising thefts? No, this time there are no Sears. No JCPenney. But I would expect more closures in the malls if business doesn't pick up as we still have too many stores.

Go listen to the recent Estee Lauder (EL) quarterly earnings call if you want to know the future. They are closing 250 unprofitable stores and eliminating 2,500 to 3,000 positions globally. Or watch what the brilliant Mary Dillon does with Footlocker to right-size that operation. (The footwear retailer on Friday appointed the former Ulta Beauty head as CEO.)

The economic boom spurred by the federal government during the pandemic gave us too many jobs and the infrastructure jobs will not make up for them. But this is a tough one, because by all measures the economy only became different two months ago. As it settles in, the layoffs will occur.

As the Fed goes back to work next month, we are going to hear that there is more work to do, which means the job market is still too strong. The only place we actually need more jobs is in the building of multi-family homes. I simply do not understand why that is not happening. You would think that the large builders would get a handle on what is really needed — expensive rentals — and make it happen. Instead they are relying on scarcity of homes to keep pricing unfathomably high.

Now we are seeing trade-downs everywhere which should put pressure on the weakest of brands. We know that there are too many supermarkets, given what we are seeing from Walmart (WMT) and Target (TGT), so we have to watch that cohort. Too many drugstores post-Covid. Too many people running hotels after the success of Airbnb (ABNB). Too many restaurants because of DoorDash (DASH).

Walmart will certainly have to dole out more and better deals to get rid of its $1 billion worth of excess inventory. Other trade downs: the incredible buys on refrigerators and home entertainment on Best Buy's (BBY) site. In the meanwhile, I am seeing heavy consumer branded goods at Ollie's (OLLI) and soon TJX at marked-down prices.

Now this part of the downturn is very painful. Sure the job market can afford the layoffs — at first. But if they come from thinly capitalized outfits that recently came public, they will be in the headlines constantly.

Without them, though, the Fed will have nowhere to go but continuing to raise the cost of money by selling bonds — which it has done very little of — and raising rates, which it's well along doing.

Either way, you need some safety here to go with your offense of old. 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 which we intend to present to you.

(Jim Cramer's Charitable Trust is long AMZN, COST, F, GOOGL, HON, LLY, META, PG. See here for a full list of the stocks.)

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.

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