In my previous report, I stuck with my 50 bps prediction just to highlight how the Fed could be so thoughtless in raising by 75 bps. When the whole world is clamoring for 75 basis points, it is not that I have some inside knowledge. Being right or wrong in market predictions is inconsequential. What is most important is to have a good understanding of the Fed's actions and how they will deal with our future. The last time the Fed raised rates by 75 basis points was in 1994.
And what did the Fed end up doing after that? In seven months, they were back to cutting rates again. At the moment, the Fed is crashing all the markets and all asset prices. And believe me, their policies are simply not good enough to address the inflation issue.
The truth is that the ‘real’ inflation is much higher than what is represented by the CPI of 8.6%. I highlighted this yesterday. Has the prices of chicken, eggs, gasoline, bacon, and electricity risen by more than 8.6%? You bet they have and if anything should be close to 16%-17%. The shadow stats will tell you what the real inflation is.
Raising the Fed funds rate by 75 bps to 1.5% doesn’t really mean anything nor will it go to solve the real problems that are ahead of us. The truth of the matter is this didn’t come as a surprise. How is it that without real data, statistics, or analysis, people like me can see the tsunami that is ahead of us? We have been writing about the inflation issue for two years.
The Fed clearly missed its chance to address the inflation issue last year. Now if they are really serious about inflation, they should raise rates to 9% in one go. You and I know very well they will not do such a thing. Since we have been discussing so much on interest rates and inflation let’s take look at the major global markets as well.
Yesterday, the Swiss National Bank raised rates by 50 basis points. This month alone Australia and Canada raised rates by 50 bps. The Bank of England raised rates for the fifth time in a row. This all sounds very dandy and aggressive but not any of these central banks have taken rates above 2%. What I didn’t tell is two other major economies, Japan and Europe are still continuing with negative interest rates.
The average inflation across these countries is above 6%. So if you take globally what we have done is an average of 0.6% interest rate for 6%+ inflation. Mind you, I am just simplifying things for the readers here. The inflation fight of the 70s and 80s both required taking interest rates above the rate of inflation to beat it. That just is not going to happen this time.
I am more than convinced that all that is happening now is tough talk and some actions. Very soon, the central banks would all join together finally to do something different. I think those discussions are probably happening in the background. While I have alluded to a reset in markets, that may not happen immediately. Instead in many other ways, the central banks can get creative.
The pain that we are facing can become unbearable and exhausting. The central banks will sense that. They could pivot to a different set of tools in the form of stimulus, easing, and eventually yield curve control, in order to reduce the pain. I really don’t know what that could be. At the moment the US and Europe policies are not in line with Japan. They can get together to have a common policy or similar policy. That was my whole point in reminding readers not to ignore the central bank's actions.
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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.