A lot is happening in the markets too fast to put a finger on. The Fed meeting is just a week away and this will be a very important one. Something is amiss, particularly in the currency markets but the pressure is being felt in the equities and the interest rate markets.
We all know that the Fed is way behind in its inflation fight. To be honest, the Fed funds rate is 825 basis points below the rate of inflation. It has never been this way in the last many decades. From the time Fed Chairman Paul Volcker brought hyperinflation under control in the late 70s at a considerable cost to the economy, subsequent Fed Chairmans have mostly dealt with deflation and not inflation.
China becoming the world’s producer of everything you can think of at unbeatable prices and technological advancements contributed to that deflationary environment.
But that’s all changing now. The globalist narrative is under threat. The excessive money printing in the wake of the pandemic has created stress points that conventional economic theory cannot explain. Common sense in printing excessive dollars would have told you that the dollar should be going down but the dollar has been going up. So, what’s it that we don’t understand?
History tells us that the Fed has to raise rates to exceed the rate of inflation to bring inflation under control. Don’t think that is going to happen now. Why do I say that? All along until last Nov, the Fed has played a denial game on inflation. Even now when inflation is out of control, they are communicating that the rate hike cycle will be a shallow one not exceeding 3%.
This is no way to manage inflation expectations but we do not know what’s on their mind. One thing for sure the dollar going up is disinflationary. Is this really a big deal? Yes, it is. The Euro is trading below a clear trend line for the first time since its formation in 1999. Secondly, the USD/JPY is at a 20-year high.
Remember most commodity prices are priced in dollars - the major one being oil. The price of oil is up almost 70% and the dollar index is up around 14% for the year. How does that do for non-dollarized countries? The dollar mostly had an inverse relationship with the price of commodities but looks like in the current situation it is broken down.
Remember the Fed will also be starting QT (Quantitative Tightening) next week while the third biggest central bank (BOJ) is moving to unlimited QE. Japan has clearly stated that they will buy bonds as much as they fit, as part of their yield curve control in maintaining their ten-year yields at 0.25%. They are willing to sacrifice their currency for the bond markets. In Japan, they can buy stocks, real estate, and corporate bonds.
How will this play into the global situation? I think there is some level of coordination between the major central banks. While the world allows Japan to devalue the Yen, inflate away their debt and increase export competitiveness, the Bank of Japan could be a buyer of US government debt to keep the markets in check. It helps the Fed some room to manage their hiking strategy. China is hardly buying any more US bonds.
Whatever it is we are at the cusp of some sort of reset in using CBDCs and cryptocurrencies. The current dollar strength is NOT sustainable!
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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.