Markets Wait For Powell’s Put
Stocks are on edge. Half of all stocks traded on Nasdaq are down 50%. The index itself has lost 5% this week, and is down 5.6% year to date.
A brutal January so far follows an equally brutal November and December. Just a handful give the Dow Jones index or S&P 500 their green. Most are very much in red.
Bitcoin is rekt. Down to $41,000 with it losing 20% this week as relentless selling gives no respite.
The weekend will give some time to think, but the big question is are we at risk of panic?
A property collapse continues developing in China. Seemingly unperturbed, the unaccountable and the unelected authorities there continue to bully the market with Tencent seeing a drop after selling some stake to address potential monopoly concerns.
While gas and oil prices are rising, the Kazakhstan dictator has given his army shoot to kill orders with a potential massacre unfolding in the internet blackout-ed country.
It is that gas and oil, as well as rising prices in general, that are putting the economy at the forefront for voters in UK.
Households are expected to be £1,000 worse off due to rising energy bills with Rishi Sunak, the chancellor, looking to see what he can potentially do.
Tax cuts, you’d think, even as the debt mounts. A debt that is far too big in any event and is mostly ‘owed’ to the Bank of England.
At least they’re talking about it in the United Kingdom. In US, Joe Biden’s poll ratings have collapsed. Voters think, perhaps very rightly, that he is doing a terrible job on the economy.
No one wants higher taxes when government spending accounts for 50% of the GDP, and however much he might say only the rich will pay more, everyone knows it is the middle class and the poor that will actually pay for it in the end.
That tax re-adjustment is partially why stocks have been a bit wobbly as ultra-billionaires like Elon Musk or Sergey Brin sell en mass pension held stocks.
Throughout much of this, Biden has said nothing. He is silent on Kazakhstan, he is silent on the economy, he is silent on rising commodity prices, and really for non politics junkies, he is just silent full stop. It’s as if there isn’t even a president.
The equally old Janet Yellen has also presumably disappeared to a different universe because now entering her second year, we have also heard absolutely nothing from her too.
It’s not like she’s in control of trillions, and has one of the most powerful job in the world. It’s more like she doesn’t quite exist.
So that means Jerome Powell, Fed’s chair, is now the President and the Treasury Secretary and the whole shebang. And thankfully, he both speaks and also listens.
The recently released minutes of a meeting in mid-December suggest a fast and furious approach to increasing interest rates and withdrawing bond purchases.
As such he probably attributes the recent stock action to a tantrum about those minutes. Crying babies wanting more candy from papa.
Yet it is a tricky situation because a lot of the inflation is probably due to a huge pick up in economic activity last year, something that is very unlikely to repeat this year.
If it does, then probably most would like and very much 6% inflation if it comes with 20% GDP growth. That means we all get richer by 14% in real terms.
We’d be lucky to get 5% this year however, in which case there isn’t much reason to think inflation would be 6% with a slowdown in China where they may even have a recession due to some extra lockdowns.
If we get meager growth with high inflation, then one can consider fast and furious. Huge growth with some inflation, however, is instead something that we should repeat if we can.
We can’t though because that huge growth came after a huge contraction. And thus acting on it before we get a clear view this year risks making a significant mistake as it could needlessly cause a recession.
Moreover, despite this inflation the dollar is still strengthening. So imports are actually becoming cheaper with it possible that a lot of this inflation is due to the CNY strengthening by more than 10% last year.
CNY is set to weaken now, which means those Chinese goods will start becoming cheaper. And so inflation will reduce.
There isn’t thus any urgency to act because the dollar has a lot of room, and so a fast and furious approach is not warrented.
Slow and steady, very slow, so that we get a clearer picture this year first. If there is a rate rise thus, in our view there shouldn’t be one before November as we need a lot more clarity first.
The Bank of England has jumped the gun though, but their pound was falling. The dollar is rising. That makes it a very different situation because too strong of a dollar isn’t too good as exports become uncompetitive.
The priority must thus be the economy, and if we keep getting robust growth then inflation doesn’t matter as long as we’re growing in real terms faster than we have for decades.
If these two go in contradictory directions, then there might be reason to worry, but so far, much is happening precisely as you’d think would happen.
That means, if we continue to have strong growth, then interest rates will rise but not before we have a fairly good idea that we are indeed getting strong growth in real terms.
In short, in our view, Powell has to stick with his original plan to let inflation run higher than usual so as to shake the economy out of low inflation and low growth towards a trajectory where we get decent growth and with that obviously there will be some inflation.
We need at least another three quarters to get some idea of whether that plan is working, and so until then he should just hold on in the face of some pressure because this isn’t quite a tantrum, it’s more the market saying it thinks he should go slower so that he takes the market with him so that the market doesn’t quite care when interest rates are eventually raised.