The market catches a bid and it is not able to sustain it. The rallies are short-lived. The finer details are never in the headlines but buried in between the lines. We have to understand what is being communicated by people in authority and why they are doing it and the way they are doing it.
Chairman Powell has made a 180-degree turn and has become an inflation fighter. As I outlined in my previous report, this is all part of the ‘forward guidance game’. Only thing is that it is in reverse now. The Fed is using stocks as a tool to bring down demand which should help inflation come down.
We have to go back in history. After the GFC as well as at the outset of the pandemic, the Fed explicitly influenced stocks higher in a low and rising inflation environment. Now they are doing that just in reverse by talking tough and communicating tougher financial conditions which will be a headwind for stocks. I doubt that the bond market is fully buying Powell’s rhetoric. If anything, after the Fed talk, yields moved lower.
Is the Fed making progress in this strategy? I think they are. The euphoria and animal spirits of the many participants in the markets have been affected. The conversation has now changed from boom to possible recession. This should slow the rate of price change and inflation. But the unfortunate thing is higher prices will continue to stay due to bottlenecks in the supply chain and the supply itself.
One offset to this will be wage growth. No doubt the low end of the salary scale was adjusted sharply higher to get people back to work and to avoid street protests. Currently, there are two open jobs for every job seeker. The Fed wants to bring this ratio down. All this time, the Fed was begging corporate America to raise wages when inflation was down but now they are worried about wages going up meaning inflation going up.
However, there will be a slow adjustment in wages across the rest of the pay scale. It will still not increase the standard of living or quality of life. But I still believe the markets can still go up before it makes a climatic top.
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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. Currently, he is a co-founder of a new hedge fund where foreign citizens can invest in Indian growth stocks like Tanla operating in hyper-growth markets like CPaaS.