Rampant volatility 'round the corner

Abraham George Market Musings

The Fed’s primary responsibility is to maintain ‘price stability’. While it has many other responsibilities like supervising banks, fraud management, the main responsibility is to facilitate and oversee a smooth running of the economy. Managing monetary policy, quantitative easing all fall under the catch-all umbrella of ‘price stability’.

The debate in the market is that the Fed has deviated from its primary responsibility or created situations that can cause much instability in the future. It is for that reason that the legendary investor and billionaire hedge fund manager Paul Tudor Jones said ahead of the meeting that this week’s meeting was the most important one in Jay Powell’s career.

Paul Tudor Jones was concerned that the Fed will continue to stick to their line of ignoring what was so obvious in the markets. However the good thing was the Fed did indeed acknowledge the higher growth and inflation environment. Yet, they did nothing.

That did create a turn of events in the markets. The dollar was up sharply, commodities were down big time. Especially, gold smacked everyone in their face. If you have been reading me long enough, you should be knowing how skeptical I am about gold. When all the pundits agree that gold is going to take off, it readily makes a U-turn with egg splattered on the faces of the gold analysts. In the current down move, it has fallen almost 180 points in no time. I haven’t done much analysis on gold now, so I cannot comment on its future direction from current levels. I will try to put out something next week.

Common sense dictates that if the money supply is jacked up by 30% like last year and if it is chasing a finite supply of goods, you are bound to see higher inflation. With the response the market has accorded the Dollar and the commodities, is that there is monetary policy divergence coming soon: i.e. the Fed is tightening money while the rest of the world continues to ease. In a couple of weeks, we will get second quarter economic data and Q2 earnings data, which should catch everyone’s attention.

Add to this the colossal infrastructure and clean energy program to start working its way through a party-aligned Congress. One thing you can be sure of - we will be never short of volatility. Be prepared for roller coaster rides and practically you may see it in every major markets.

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.