I was at a day surgery hospital for a gastroscopy and colonoscopy examination. The appointment came after a six months wait. So I didn’t want to miss it. I myself don’t know what those terms are and I don’t want to know too. My specialist doctor told me I am slightly iron deficient. So I had to do these tests. I think he wanted to rule out any symptoms of cancer. I guess I am ok after the tests.
The level of professionalism and attention to details is quite admirable in Australia. For once, it felt nice to be in a hospital under anesthesia. The doctor’s simple advice to me for the day was to steer clear of alcohol, driving, and signing any legal papers. I liked the legal paper part of it the most. Let’s turn to markets.
Inflation has been the talk of the town. The June inflation rate for consumer and producer prices came stronger. On an annualized basis, both are in double digits. Markets have quickly switched to pricing a 100 basis point hike at the 27th July Fed meeting.
The immediate reaction of the stock markets was to head south and that too deeply in the red. But by the end of the day, most losses were recovered. Especially the most interest rate sensitive index NASDAQ finished up in the green. What does this indicate? I think the smart money is not buying into the 100 bps story.
As I have been alluding for a very long time, the Fed has the tools to tame inflation. The only way to tame inflation is to take short-term rates above the inflation rate. That’s the way it was done in the past. The Fed is almost 8 percentage points behind the curve. They are just not going to go that high. The adjectives of choice that they have employed in dealing with inflation are ‘expeditiously’ raising rates and ‘significantly’ reducing the Fed’s balance sheet. Both are not happening in the way they are describing them to be. The Fed is a paper tiger. I know - I sound like a broken record - but it is what it is!
What we also need to understand is while the US government can withstand the pain of nearly double-digit interest rates as they make their rules according to the situation, the rest of the world cannot.
Capital is clearly flowing out of all parts of the world into the US dollar. Partly it is because US bonds are paying higher coupons now but mostly it is because of the safe haven status the US provides in times of global uncertainty (real or perceived).
So far we have seen the complete collapse of the idyllic island country Sri Lanka and debt defaults by Russia. Public chaos and riots are rampant in China as investors cannot withdraw money from their banks. Sovereign debt crises tend to be contagious and they can create a cascading effect around the world.
The Fed knows this very well and they want to be socially responsible. At least they can be comforted that the stronger dollar is anti-inflationary.
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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.