There will be a change to how my daily and weekend pieces are published quite soon. I'll have the details in the near future.
We caught a portion of an interview this morning with the President of the World Bank, David Malpass. In it, he touched on the thought that the Fed wants to get interest rates back to “neutral.” The line of questioning that followed missed the point. Mr. Malpass was telling them that the Fed needs to get asset prices back in-line with their underlying fundamentals. He talked about how interest rates around the globe have been…and still are…extremely low. However, the line of questioning continued to focus only on inflation…and how higher interest rates would hurt the economy.
In other words, in his answers, Malpass was saying the same thing we’ve been saying for some time now: The Fed’s goal is not just to tame inflation, it’s ALSO to get interest rates (and thus other asset classes) back to a “neutral” level…one where they can trade on their own!
The divergence between what the leading narrative is on Wall Street today…and what the real situation is right now…is creating a situation where too many investors are focused too much on the issue of inflation. Don’t get us wrong, the issue of inflation IS a VERY important one. If inflation is not tamed, it will create a lot more weakness in the economy than we’ve already seen. However, the Fed was ALWAYS going to tighten policy…whether inflation became a problem or not! They HAD to get the financial system off of the steroids that their zero interest rate policy and their massive QE program had provided.
Therefore, asset prices were always going to have to come back down from levels that could only exist with artificial steroids (zero interest rate & massive QE). NOW, because the Fed kept the liquidity spigots open too long…fiscal stimulus increased…and Russia invaded Ukraine, inflation has indeed become a big problem. Therefore, the tightening policy has to be stronger…and has to last longer. With the need for the tightening policy to now be more intense, asset prices have to fall further than they would have if inflation had not become a major issue…….Investors need to stop avoiding this reality!!!
The Fed is between a rock and a hard place. If they pivot too soon, inflation will crush the economy and thus crush the markets. If they continue on their path in order to tame inflation…they will still hurt the economy and hurt the markets…but their view is that the pain will not be as bad. Therefore, what the Fed has done is to pick the lesser of two evils. Yes, they are part of the reason why we’re in this mess, but they’re certainly not all of it. Besides, if they had not acted SO strongly in 2020, the financial system would have collapsed. (We strongly believe that comment is not an exaggeration at all.)
In other words, if the Fed “pivots” now and completely stops raising interest rates…or does so in the very near future…like some pundits are saying they should do…it would leave interest rates at an artificially low level…and stocks at an artificially high level. That will create the kind of bubble that will crush the financial system once it inevitably bursts. Also, it would risk keeping inflation higher for longer…which would do more harm that what their tightening program is currently inflicting.
What we’re saying is that if the Fed completely pivots at some point soon after this week’s rate hike, they will NOT have solved the full problem we’re facing today. Some people seem to think that it’s the Fed’s job to keep “free money” flowing in the system forever…and keep asset prices at artificially high prices forever…but they’re WRONG. Those people want their cake and eat it too…and that is not going to happen.
The Fed is not anywhere near as stupid as many people believe today. It’s those people who are the dumb ones. They think that the financial system can run on steroids forever. They don’t understand that if the kind of accommodative policy that has existed for most of the past dozen years is followed for too long, the result will be much worse than anything we’re likely to experience going forward…EVEN if what we’re going to experience near-term ends up being very painful.
As for today, it’s a day to celebrate a life very well lived…….God Save The King.
Matthew J. Maley
Chief Market Strategist
Miller Tabak + Co., LLC
Founder, The Maley Report
275 Grove St. Suite 2-400
Newton, MA 02466
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