Softly, softly? Hardly! | by Paul Gambles
Don’t you understand what I’m trying to say?
Can’t you feel the fears I’m feeling today?
If the button is pushed, there’s no runnin’ away
There’ll be no one to save with the world in a grave
Take a look around you boy, it’s bound to scare you, boy
And you tell me
Over and over and over again, my friend
How you don’t believe
We’re on the eve of destruction – Eve of Destruction, Barry McGuire
As expected this week’s meeting of the Federal Open Market Committee (FOMC) decided to raise US interest rates to a 22 year high.
The Fed Funds Rate target range was increased to 5.25% – 5.50%.
This was in line with pretty much all market expectations, leaving Fed watchers to keenly parse the language of the accompanying FOMC statement. This statement indicated that decisions will be “data-driven” and “on a meeting-by-meeting basis”. Markets breathed a sigh of relief at this largely meaningless nomenclature, on the basis that at least, unlike some previous FOMC statements, it did no specific harm. We’ve pointed out in the past that phrases like “data-driven” and “meeting by meeting basis” are functionally meaningless. After all it’s not like the FOMC is likely to announce that going forwards it will make whimsical decisions that totally at odds with data just because they feel like it. Similarly, the actual purpose of having FOMC meetings is principally to make these decisions in the light of updated information and data.
Rather than getting too caught up in the latest data points or short-term trends or the most recent Fed speak we’ve previously made the point that it’s important to zoom out sometimes to a broader perspective. That’s not to say that there aren’t short term opportunities stemming from these data or trends or statements but we believe that asset allocators need to have a fundamental understanding of the bigger picture as the context or setting for these shorter-term factors.
With that in mind we thought it useful to recap and review our longer term thinking which we’ve shown below:
2009 to 2012 – ‘Recovery’ from the Global Financial Crisis (GFC) was facilitated by many of the policies the caused the GFC but enacted on a far larger scale.
2012 to 2019 – A series of rolling global attempts to correct the imbalances created pre-GF C and post-GFC policy. Ultimately these attempted corrections failed on each occasion and were abandoned with reversion to the prevailing policy playbook. These failures therefore did nothing to address the escalating and accumulating imbalances
2019 to 2020 – Policymaker’s further attempts to tackle imbalances was already beginning to fail when it was completely overtaken by COVID. The Great Lockdown led to the biggest policy responses on record resulting in the biggest imbalances of all time.
2020 to 2021 – This gargantuan policy response created multiple simultaneous asset and economic bubbles
Late 2021 to date – Policy makers have once again tried to let the economy and the markets down gently which leaves us in the current situation. Our view is that policy makers generally don’t do ‘gently’ very well. Policymakers also tend, as BOOM Finance and Economics editor Gerry Brady pointed out, to be much more effective on the brake than they are on the accelerator (meaning that their record at slowing economies far outweighs their success at stimulating economies, even though they have undaunted and thoroughly unjustified belief in their ability to perfectly calibrate both functions). Above all, they seem to be using the wrong toolkits (stocked only with blunt instruments) to implement the incorrect fix for the misdiagnosed problems.
Our position in 2021 and last year was that if they continued this response there would be a significant capital market reaction at some point but that this could be averted if they changed policy (or in fed speak ‘pivoted’) at some point. In the first half of this year we recognised that they had continued and had not pivoted. It seemed hard for us to imagine that this wouldn’t cause major problems either in the second-half of 2023 or possibly in 2024. Nothing in the recent data or trends and certainly nothing emerging from yesterday’s FOMC announcement causes us to re-think this.
In future notes we plan to examine various indicators that support our analysis. We will also try to analyse the impacts and the possible and expected outcomes for the various asset classes and for different economies and different currencies.
MBMG Investment Advisory is licensed by the Securities and Exchange Commission of Thailand as an Investment Advisor under licence number Dor 06-0055-21.
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About the Author:
Paul Gambles is licensed by the SEC as both a Securities Fundamental Investment Analyst and an Investment Planner.
Please Note: While every effort has been made to ensure that the information contained herein is correct, MBMG Group cannot be held responsible for any errors that may occur. The views of the contributors may not necessarily reflect the house view of MBMG Group. Views and opinions expressed herein may change with market conditions and should not be used in isolation.