Growth vs Inflation: When Will The Fed Blink?

Abraham George Macro View

The growth vs inflation conundrum is one of the most pressing and confusing discussions in investment circles. I have been a Fed watcher for a very long time. Probably more than any one who is probably reading this. In all this time, the Fed has not revealed themselves about their plans as much as they are doing now. For almost a year, the Fed has been preparing us for what is happening in the market now. For those who are concerned about stocks because of the hot inflation data that is in front of us, they must not be listening to the Fed.

All others can find comfort in the words of the Fed. The Fed has told us that they see inflation as transitory. They have also told us that they will let inflation run well above their target of 2% until they believe it to be sustainable. They key operative word is sustainable. If you believe in this gameplan, one should be betting on an inflation storm scenario, because the Fed will be slow to respond to inflation. So, we can safely wait for the Fed to panic to a point when they want to kill inflation. The question is will they crush economic growth and asset prices. Don’t think any time soon. Until then, the prices of everything should continue to edge higher.

The recent dip in stocks was an opportunity to buy. In the cash markets the dip looked shallow but in the futures market, the peak to trough decline was a solid 5% . That also is an indication of the leverage in the current markets. The market dropped exactly down to its 45 degree angle trendline which provided some great buying opportunity. Another market that bounced of a significant trendline was oil. Oil’s upward trend since the Election Day remains very intact. I won’t be surprised if oil found its way to $ 100 and then it will become a talking point.

All this has seriously not effected the dollar and if any, decline has been orderly. When will the dollar go off the rails? I think when it becomes clear that the administration will push through another $4 trillion in spending, in the face of clear economic strength and inflation pressures. The dollar will undoubtedly be the escape valve for all these games that the Fed is playing.

Equities

From the recent past we witnessed one of the most volatile trading last week. This pattern should continue again in the coming weeks. The price action argues that it can rise to 4200 to 4210 in the S&P 500 where it should find considerable resistance. A move below 4130 invites trouble for S&P. The counter trend rally in the NASDAQ shows much weakness and also argues why value stocks will be more preferred than growth stocks at this stage of the economy.

Bonds

Bonds have been in a complex correction. Prices should decline to 152 but a stronger target will be 146^30 to 148. Should prices rise above 160^15, we have to assume the correction is getting more complex before it comes down.

Euro

The rally from 1.1700 area, the low on Mar 31 should carry prices to 1.2350 or above. Prices could decline coming week and may even fall to 1.1950 - 1.2000 before rising again.

Gold

Gold has immediate resistance in the area of 1855 and 1875-1880. A close below 1800 will argue that the upside pressure is over.

Abraham George is a seasoned investment manager with more than 40 years of experience in trading & investment and portfolio management spanning diverse environments like banks (HSBC, ADCB), sovereign wealth fund (ADIA), a royal family office and a hedge fund.