The Fed Chairman Jerome Powell has been doing a lot of tough talks. Some of his lines have been “The Fed’s commitment to reining in 40-year high inflation is unconditional. The central bank is focused on getting rapid inflation under control. A soft landing is not guaranteed and so on.”
The truth is that the Fed in less than one year has gone from denying inflation to shouting from the rooftop that this inflation was totally unexpected and they are going to control it with unprecedented hikes. The general public has bought into both narratives. But both narratives are incorrect.
After running behind the fire engine for so long, Powell wants to be in front of the fire engine now. However, if things really turn out of control the politicians will be quick to throw him under the fire engine. They will make him a victim and I think Elizabeth Warren will lead that crusade. In my living memory, no politician has admitted a mistake. But let us take stock of the real market situation now.
To be honest, so far the Fed has done a good job by threatening and not making any meaningful adjustments in interest rates considering the state of the inflation.
They have verbally attacked demand and have flipped the conversation from an inflationary boom, to a recession. The market has been quick to cooperate with the Fed in bringing the stock markets down. This half-year has been the worst-performing stock market in the last 50 years.
The Fed really doesn’t have the means or the tools to fight a 1980-type inflation situation. So they are adopting other means. As per the most viewed Atlanta Fed’s GDP model, we have had two consecutive quarters of economic contraction labeling the economy to be in a recession.
I think this has been clearly priced in by the stock market and the latest price action in bond markets also confirms this. Fed’s inflation data viewed (Core PCE ) has declined for three consecutive months.
As with the release of yesterday’s manufacturing data, the price component is softer and is also in decline for three continuous months. With higher inventories, new orders have been slowing. In return freight costs are starting to ease.
All this is good news for the Fed. Many will not agree with me but I have been arguing that the Fed will not stick with its announced plans of interest rate hikes for long. I won’t be surprised if they stopped hiking at the next meeting.
If that is the case we are going to see a very strong equity market in the coming months. Cashflow-positive companies are the place to be. In sympathy with the highly geared stocks, good stocks have also come down sharply. It is time to load up on them now.
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Abraham George is a seasoned investment manager with more than 40 years of experience in trading & investment and multi-billion dollar portfolio management spanning diverse environments like banks (HSBC, ADCB), sovereign wealth fund (ADIA), a royal family office and a hedge fund.