How The Fed Changed And Why One Pro Will Buy The Next Correction

How The Fed Changed And Why One Pro Will Buy The Next Correction

Yet, when I look at the traditional executioner of bull markets (the Fed), I see a reformed killer who has little interest in hurting any fledgling recovery. [Editor’s note: The following excerpts are from a longer piece by Kevin Muir, formerly head of equity derivatives at RBC Dominion and better known for his exploits as “The Macro Tourist.” The full piece is available exclusively to his subscribers. Those interested can check out the new MacroTourist here.] If we accept that in th
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10 thoughts on “How The Fed Changed And Why One Pro Will Buy The Next Correction

  1. Yeah, another change in the world of markets when comparing post- to pre-COVID…”employment and economic growth will trump everything else.”

    Thank you for periodically sharing these notes from Mr. Muir. Greatly appreciated.

  2. The contrary scenario I’d think about is if the Fed sees Congress continuing to withhold fiscal stimulus, leaving the Fed and its limited tools as the only support, such that asset prices fly higher and higher while ordinary Americans sink deeper and deeper. At some point Powell might decide that the gap between Wall and Main is intolerable, and that the Fed needs to force Congress’ hand.

    The other scenario I’d think about is if Congress takes away so many of the Fed’s tools that all Powell can do is suppress rates and create liquidity in money. We think of the Fed as able to buy anything and drop money from the skies, but Congress can easily clip those powers. If over-use of those limited tool results in negative real rates and forced extreme risktaking, Powell might decide that his medicine is killing the patient.

    I don’t know how likely these scenarios are. I doing think the are outlandish.

    1. Considering partisan incentives and recent behavior of Republicans in Congress I believe continuation of a divided government supports both of your scenarios. A Warnock/Ossoff victory in Georgia would undercut them.

  3. I am worried about the future and the competition. Every nation state will be trying to get an edge in employment and production. The Chinese are so close to being the top dog they are straining at the lead. They have the pick of the best educated, the money to invest in the best equipment to produce in scale, and they are worming their way into third world countries that have raw materials they need to ensure they have enough. Any new industries and technology we develop they copy and can dominate if they want. We must control our military equipment production ourselves. No matter the cost. but there aren’t enough jobs to employ everyone in just this area. (I hate to have to give Trump any credit but the ‘Space Force’ is going to be of critical importance in the future.) A lot of our industrial might is now outdated and no longer competitive. It will take years to rebuild. Will we now be in the position of always playing catch-up??

    1. Agreed. “Unemployment targeting” was perhaps more appropriate in the past when unemployment seemed more driven by dissatisfaction with work/wages, leading people to look for new opportunities. That in effect drove up wages while the cost of assets were more reasonable. People could get by without work for a couple months. Now, unemployment signals a lack of opportunity with an economy near full capacity, which has completely different dynamics. It does nothing for the average person, and asset valuations are now extreme. Honestly I’m not sure this is much better but I understand the Fed’s position given lack of fiscal spending. Very twisted situation. I guess it’s human nature to push things until they break, but the likely “breaking point” is far off and will be very severe this time around.

    2. Lourdes: The short answer to your question is most certainly yes! Soon China will have a legitimate, fundable call call on more than 25% of the world’s resources and that demand will rise as they raise more and more of their people into the “middle class.” (Some estimates say 400 mil are already there — more than the population of the US.) The trillions we have wasted on stupid wars (yes, stupid) over more than two decades has given China much time to remain mostly invisible while it catches up with other top nations without anybody really believing they are doing it. As the attitudes of a huge proportion of our population have shown this year, denial is a powerful urge. People are denying the existence of COVID from their death beds. Every time I read a story about China that reports economic growth, scientific accomplishment, etc it almost always contains words such as:: “If you believe their numbers.” If there’s a bet in Vegas for over/under on numbers from China, I’ll take the over. After all, they’ve been making half our stuff for decades. If the stuff is good enough for us to buy why not buy the numbers? The rise of tech and a long history of a driven culture have allowed, even supported, China in their quest for hegemony in a way never seen before. Tech, especially, has created opportunities for China at just the right time. They are leapfrogging us with their own stuff. They now make the fastest supercomputers and now entirely out of Chinese parts. Frankly, I’m kind of glad I’m old. If you want to see where one man sees this going read Neal Stephenson’s “Snow Crash.”

  4. I always remember Kevin saying ..’I am not here to tell you what should be just mostly what will be ‘ He was right and we all sensed
    it ,, The issue I see now is that an awful lot of people see the exact scenario articulated in this post exactly as does Kevin. I being somewhat contrarian and usually preemptive agree with what he is saying as well. That is cause for worry because there starting to be a few too many people on the same side of this boat… Powell to me is being a lot more pragmatic about his actions than most of us would have imagined a couple of years ago.. He is more in agreement with his predecessors but again if you do the math and view the geopolitics the explanations for the trajectory we are on is painfully obvious , We are being forced by circumstance into a specific set of actions ( most nations) and that adds to the predictability of the outcomes we may come to see. These outcomes will not likely make us as a group feel like the geniuses that we obviously are (pun)..

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