The next leg of the bull market will be the most dangerous.

Abraham George Market Musings

So what happened with the much-anticipated Fed meeting? Nothing! As expected the Fed did not move or give any further guidance that we already don’t know. The Fed reiterated that interest rate hikes will happen towards the tail end of 2023 and that too two times. They have never been explicit like this in all the years that I have been following the Fed. They have always kept the market guessing, mainly because they don’t know how the market responds to their actions. So they are forced to be dynamic. As for now they have figured it all out for the next few years.

The Fed sees growth coming in at 7% . It sees unemployment falling to 4.5% . Historically that level of unemployment is considered to be ‘full employment’ . And it sees inflation running at 3.4% which is considered to be the long- term average.

Who am I to challenge the Fed? But for the first time, I feel the Fed is going to be wrong and way off their calculations. There is an element of arrogance in the way Fed views economic developments and how they will manage interest rates. It all depends upon how they assimilate exogenous factors that can happen, which is beyond their control. It has always been like that and always will be. When that happens they will throw their models out of the window, and then do fire fighting.

If the economy is doing so good, why is the Fed still continuing to buy $120 bio in bonds every month? The Fed Chairman wasn’t even questioned once yesterday why the Fed is still running an emergency monetary policy program. These programs are explicitly structured to promote lending and investing. Investing and lending are already at record levels, so how can you pursue this further without further rise in inflation. Something has to give.

So given the Fed’s own projections on the economy for this year, and given the achievement of its goals on lending and investing, the Fed should be exiting these emergency policies, not in 2023 or in 2022 but immediately.

How did the market react to yesterday’s events? With the overbought nature of the markets and the general tone of the Fed Chairman, it was viewed as slightly hawkish. So the market sold off a bit. But this is temporary. The market will rise again and it will rise hard. Think it will be a ‘buy everything’ market for sometime. It is clear the Fed wants to inflate asset prices and deflate debt.

The next leg of the rise in markets will be the most dangerous. It is a period you want to be invested at the same time think of being in cash as well. Never look for the market top. Nobody rings a bell at the top. So if you are fully invested, plan for being in cash as well.

Inflation is a hidden tax. It is like a crocodile lurking in a placid water body. You know it is there but you don’t know where it is. So prepare yourself for big volatility in the market. Good technical analysis and sentiment measures should help you navigate through these tough times. As Humphrey Neill said, “Don’t confuse your brains with a bull market”.

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.