Mixed Markets, Shifty Fed and Looming Proxy War
Abraham George Macro Musings
The markets have been mixed and the Fed has been shifty. After the FOMC meeting, the Fed laid out a plan on their interest rates path going forward for this year and next year. The impression gleaned by the market was that there could be a 25 basis point hike at most of the major Fed meetings for this year and the early part of next year (the next Fed meeting is in May). The communique didn’t sound that the Fed’s priority was all in to fight inflation.
Jay Powell probably felt that he’d under-delivered on his commitment to fighting inflation at the FOMC meeting. So in a prepared speech on 18 Mar, Powell set the expectations for possible 50 bps increments. He also made it clear that the Fed is no longer sitting back and waiting for supply disruptions to normalize. They are looking to bring demand down, to come in with supply.
This is a big shift from the inflation denying Fed of 2021. Let me take you back to the narrative of 2021. The Fed told us not once but many times that the deflationary forces of the past three decades will not change on a dime, and therefore wouldn’t expose us to a dangerous inflation scenario. Now he has clearly flip-flopped. Throughout 2021, they were arrogant and in denial. All of a sudden they see an emergency now. The truth is in the past tightening cycles of 1987, 1994, 1999 and 2004 the Fed has averaged about 50 bps hikes a quarter. Will the Fed hike 50 bps at the next meeting. I still don’t think they will but then who am I to challenge the Fed?
According to me, if they really did that, it would be a drastic change! The last time they raised 50 basis points was in 2000 which is 22 years back. Currently, most of the investment banks are also in line for a 50 bps hike for May. It doesn’t matter if they hike 50 bps or not. The market has already reacted to the announcement. After an initial fall in equities, the immediate reaction for the equities was to go up but the bond markets tanked. The ten-year yields rose to a high of 2.42%.
There has been a migration of money from bonds to equities. In fact, the ten-year yields had one of the biggest rise in a month as it has risen from 1.67% to 2.42% in between Mar 03 to Mar 18. I think bonds will continue to fall over time and more money should move into equities as it is the most liquid asset class that can absorb this migration.
Gold and other commodities are an option but they are small markets in comparison and extremely volatile too. I believe we may have seen the bottom in equities unless we are faced with World War 3. The situation in Europe is increasingly turning out to be a western proxy war. The NATO leaders are meeting with President Biden in Brussels today and it should be a very important meeting for the future of the world.
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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.