Market And Economic Cycles: The Dark Side Of The Boon

Whither stagflation? Say it isn’t so! Like it or not, the unrounded core inflation for January came in closer to a gain of 0.4%. In other words, look for the year-over-year rate’s next stop to be 1.9%. What could offset this march upwards? New car prices fell month-over-month and year-over-year. This trend should accelerate as millions of SUVs come off lease this year.

The question is, does the threat of rising inflation become a self-fulfilling prophesy?

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Market And Economic Cycles
Photo by geralt (Pixabay)

We’ll know with tomorrow’s release of the producer price index. That’s where the real action is that’s driving inflation -- the front end of the pipeline. For more insights into what is driving input prices, link on to my fresh off the presses Blomberg column: Inflation’s Real Threat to the Economy.

As for investors, it’s plain they’re anything close to game for a hawkish turn at the Fed. Call it the global grab for easy money. My good friend, George Goncalves, is Nomura’s Head of U.S. Rates Strategy. He’s just returned from a tour through Europe and was kind enough to share his insights into the thinking of investors across the pond. In the interest of gauging clients’ expectations for growth and inflation and how the Federal Reserve’s reaction to changes in the economy and financial markets fit into the equation, he received the following four queries:

  1.  “What would it take for the Fed to skip March, when does it need to signal?”
  2. And if it hikes in March “why would it raise the dots at this meeting when it can just wait and see how financial markets and the economy react and raise forecasts in June instead, especially since it’s Chair Powell’s first presser?”
  3. “How much of an FCI (financial conditions index) hit is needed for the Fed to abort normalization?”
  4. “Will Powell go slowly to avoid any backlash from the Trump Administration?”

Granted, these questions are to be expected after a downdraft in equities after months (years) of a non-stop rally. That said, the underlying tone suggests that many market participants are still banking on the Fed to act as a back stop should conditions worsen.

The weight of the world rests on Jay Powell’s shoulders. Let’s just hope he is strong in his convictions and that stock market hissy fits don’t equate to threats to financial stability in his mind. So far, that seems to be the case. The bounce back in the markets is no doubt buying Powell the time he needs to prepare for February 28th, when he is due to face Congress for the first time, and March 21st, when he steps into the true lion’s den, the press conference that follows the next expected rate hike.

As long as the wealth effect for the wealthy stands pat, it would seem, grace will be given. On that note, I’m compelled to share a breath of fresh air on the so-called ‘wealth effect,’ or as one clever Twitter follower rightly identified it, the ‘wealth defect.’ Many of you are familiar with the succinct work of Stephen ‘Sarge’ Guilfoyle, a hard-hitting stock jock and markets commentator who’s seen a thing or two in his career as a U.S. and markets veteran. He woke this morning feeling “warm and fuzzy.” And why wouldn’t he on this Valentine’s Day?

On the other hand, he had this to say on unicorns and other figments of our collective imagination: “Bernanke’s wealth effect…a reality in the short term. It is nothing more than a perversion of longer-term trends set to exacerbate potential declines in U.S. standards of living. A House of Cards.” Indeed.

On a separate note, I was deeply disturbed to learn of a recent Guardian story depicting a recent acquaintance of mine, Artemis Capital Management’s Christopher Cole, in a scathing, false light. As a member of the Fourth Estate, I was horrified at the insult to the field of journalism deceptively depicted as ‘reporting’ and appalled at the unsubstantiated personal attack the writer unleashed.

As a markets veteran myself, I was equally aghast at the light in which hedging itself was depicted. I will touch on the quaint stance pensions have taken with regard to hedge funds in the weeks to come. For the moment, and in defense of all true hedge funds, let me say that the sanctioning of the abandonment of hedging in today’s world should be grounds for termination. After all, when executed properly, hedging is a portfolio’s only way of protecting its precious cargo, in the case of pension funds, retirees’ nest eggs.

I’ll share with you the best of the blatantly, wrongly accused Cole’s letter to the Guardian, which I’ve linked and encourage you to read in full:

“If we do our jobs right during market turmoil and heightened volatility, teachers and doctors won’t be laid off, life savings and retirement plans are not critically harmed, and investors have a solid defensive position in their portfolio.”

Damn straight.

It’s been altogether too convenient to blame the machines for the past few weeks’ market disturbance. Don’t fool yourself. It’s the people behind the machines that foment market disruption, not the machines themselves. You’d best be hedged for what’s to come.

In the meantime, be equally safe assured that the wealthiest in our midst are preparing for what they see with their own eyes: a decided turn in the market and economic cycles. If turn-of-the-century, post Greenspan/Bernanke/Yellen-put history is any guide, rumblings in the market manifest in form of pain for the real economy. For more on how the tail of the markets now wag the dog of the economy, please enjoy this week’s installment: The Dark Side of the Boon.

To the wrongly accused my very best, and especially today, which marks the one-year anniversary of Fed Up’s release, wishing you well,