I have been a Fed watcher for over 40 years. What do I mean by that? Having a good understanding of the Fed policies and particularly the voting members’ views on various economic policies and if they differ from others by how much.
One of the very successful fund managers that I follow is Stanley Druckenmiller. He had averaged over 30% compounded returns for over decades. He has many trading and investment adages but two of the striking points that stuck with me are 1) follow the Fed and don’t go against the Fed and 2 ) Put all your eggs in one basket but watch the eggs very carefully.
Most fund managers and investment participants in the markets will not agree with his second statement of putting all eggs in one basket as it is too much of a risk-seeking strategy but he qualifies that with another observation “do watch those eggs very carefully”. What he means is to do enough research for you to be so sure about the investment that you are prepared to make that single investment. In fact, I followed up on his advice with my investment in Tanla Platforms which paid me off very handsomely.
Let’s get back to Fed watching. Fed watching is an art and it has never been as interesting as how things are panning out now. Even the current Chairman Jerome Powell makes the announcement on the FOMC decisions, they arrive at those decisions through many deliberations and obtaining consensus.
When Paul Volcker was Chairman, things were probably much different. Firstly Volcker became Chairman at a time when the US was facing unbearable volatility in inflation. Volcker was the right man at the right time for the right problem. He was brought into office by president Jimmy Carter but he became famous under President Reagan. He very much had the support of President Regan. Volcker was very single-minded and focused on containing inflation. Though he had a committee of other Fed Governors advising him and even differing with him, Volcker with his towering personality and determination carried more weight in dealing with policy matters on inflation. No doubt he threw the US into a serious recession but his decisions and actions were the right things that brought tremendous progress and richness to Americans in subsequent years.
However, we are faced with a situation of rampant inflation as in the period of the 70s and 80s now but one thing I am sure about is Jerome Powell who is very complimentary and admirable about Volcker is not in a position to take measures to contain inflation and plunge the country and probably the world into a depression. Let me explain.
We should not underestimate the significance of the events of the last Fed hike on the 27th July. The Fed Chairman said that they had reached neutral on rates meaning not accommodative nor restrictive of economic activity. He also said they would no longer ‘guide’ on policy but take things meeting by meeting based on the data.
Very soon Congress approved nearly a quarter trillion dollars of fiscal spending and also disclosed that the Build Back Better agenda would be funded too. So what is the government doing in the face of forty-year high inflation?
The Fed is forced to do ‘tough talk’ with no intention of aggressively fighting inflation. The sequence of these events should give us enough matter to pause and think about what is the Fed really up to.
Most participants concluded that the Fed will soon pivot but the July jobs report has confused everyone. The payroll numbers came in almost double the market expectations. Unemployment ticked down and wages were higher. Even the payroll revision from June was higher. But let us dig deeper.
Since March, the Fed has threatened that they were coming after employment, as a means to contain wage pressures. Raising the funds rate to 250 basis points still below more than 600 basis points to the rate of inflation hasn’t solved anything. What about earnings? As to 87 % of Q2 earnings and 75% of the companies have beat expectations. What about margins? They came in at 12.3%. It is higher than the five-year average.
Jobs are hot. Corporate earnings are solid. Consumer & corporate balance sheets and credit worthiness are as good as ever. The nominal wage growth is the hottest and so is the nominal GDP growth in four decades.
It’s not a demand problem. It is an inflation problem. So where are we going with all this? Probably we get a little more clarity when we get the inflation report for July tomorrow.
It is becoming clearer that the world is getting ready for a reset in global debt and a new monetary system. A move to digital currencies is part of this reset. A hurried move to regulate stablecoins and probably legislation on regulating private crypto through the CFTC are all part of this new world order. If you are not very knowledgeable about cryptos, I think owning gold at this point may not be a bad idea.
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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.