Skate to where the puck is going, not where it has been.
Abraham George Macro Musings
All along in my writings on Fed policies and the current government actions, it is abundantly clear that they are a “day late and a dollar short” in whatever they are trying to do. Their bark is stronger than their bite.
The Fed and the government are like a river trying to find its path to the ocean. At times, the river dries up, and other times, it floods over but for the most part, it traces its normal course to the ocean.
The Fed nor the government will never admit to any misguided policies. They are purely firefighters who find a solution to keep the system running. In that process, they make a lot of false promises plus change course or directions on a dime. They try to achieve a lot through public talk and a narrative that can achieve their objectives or maintain their status quo.
What is most noticeable now is all Fed Presidents, governors, and even past Fed officials are singing from the same hymn book. They are all so hung up on the 2% inflation rate and their talk is to get back to it. When the world was under a deflationary grip they just wanted to get to the 2% inflation target which was a tall ask, but now inflation has gone through the roof and they want to give the impression that they will fight this inflation with monetary policies similar to the Volcker period. My hunch is that this is not going to happen and I will state my arguments.
Firstly, the Fed has been bluffing us on QT (Quantitative Tightening). They have not followed up on what they promised to do as per their announcements in March. In a few weeks with the CHIPS Act, $280 bio will be pumped into the economy. Another $400 bio comes into the economy with the PACT Act (improving healthcare access and funding for war veterans who were exposed to toxic substances during military services) and now another $740 bio signed into law for “Build Back Better” (so-called inflation relief). This is laughable and a bad joke.
The truth is that the financial system is too fragile to extract global liquidity, and sovereign debt is too fragile to raise interest rates aggressively. It is a clear sign that the Fed really doesn’t have any real tools left to fight inflation in the current situation, just when Congress is passing bills right, left, and center and pouring more fuel to the fire. In the short term, this is all bullish for the equity markets and hence the up move that we are witnessing.
The combination of all that is happening now has serious consequences. If history is any guide we are moving into a new currency system and a global restructuring of debt. Actually, everything is implied in the current administration’s slogan of “Build Back Better” as opposed to the previous government’s tag line of “Make America Great Again”.
There is a new world order coming into the financial system and all that is happening in the crypto markets is part of this fourth industrial revolution. There will be a continued devaluation of currencies, relative to real assets, and with what happened to Russia in the freezing of their assets by the US and other European countries, there will be a flight from the world’s most liquid and trusted government bond markets.
Moving to cash is not a solution for these times. With increasing inflation the quality of life will go down in most parts of the world and so will the cost of living.
If the early 80s is a playbook to look at as a period of inflation where inflation averaged almost 10% over a period of four years, being long stocks not only gave you a hedge but increased your buying power above the inflation rate. Going to cash destroyed your buying power by more than 30%. So think about it.
This is a period to be long good solid companies with cash flows and dividend payments. It is also a time to be long good use case utility-based cryptos as they will be the future when we will move into a very digitalized world under the fourth industrial revolution. It is a time to get long commodities too but the real strength in commodities will come when the dollar will turn south in an aggressive way. So brace yourself for the future.
As the ice hockey star Wayne Gretzky famously quipped, “skate to where the puck is going, not where it has been”.
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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.