The Final Decoupling: Markets Achieve ‘Autonomy’ From Fundamentals
When BofA asked the 350 panelists who participated in the November edition of the bank's Global Fund Manager survey to identify the "#1 driver of asset markets" in 2022, there was little in the way of equivocation.
The participants, who together control $1.2 trillion in AUM, overwhelming chose "Inflation and the Fed."
There were five alternatives. "Reopening and profits" was a distant second (figure below) with China, geopolitics and the US midterms all barely registering compared to inflation
So, 10-15% cpi with fresh record low real yields would do wonders for multiples…
Is there a point where it’s too perverse to countenance?
The Inflation abides.
You really know how to dial right in to the heart of the matter. I appreciate that you write not only about how things “should” work, but also about how things actually work.
It is up to us to decide what is what!
How about strong economy with moderating inflation and slow normalization of rates? Oil is rolling over; supply chain disruptions in most categories to follow. The tail risk would be the extremist far-right GOP not be willing to acknowledge good news.
H-Man, Milton Freidman analogized inflation to alcholism, it starts off good with pleasant effects but when it ends, it gets really ugly.
The Fed could squash inflation in a heartbeat. One .50 increase in Fed Funds rate accompanied by more increases would pretty much do it.
It always surprises me how bad so-called experts and CEOs are at predicting the future. They know nothing.
I think that part of what we’re seeing in the economy, in the big picture, is a failure of government. There was a meta-stable period from about 1945 to about 2007 when the government of the US more or less “worked,” when there was such a thing as anti-trust, there was bipartisan guard-railing of the economy, and many systems that were not written in law nonetheless functioned according to conventions and custom. The relationship between interest rates, employment, inflation, and asset valuations was somewhat discernible, and behaved more or less according to a set of reversible functions–in large part because there was a functioning government that could adjust policy when needed. For a variety of reasons, we’re not in that regime anymore. Social media and misinformation have escaped the guardrails. Conventions of behavior in Congress are gone. Election results aren’t respected. Policy decisions are feebly channeled through the few mechanisms that are still functioning, but the result is ineffectual–we are like the mighty Bismarck, sailing in a wide circle, our rudder jammed. Laminar flow has given way to turbulence. I don’t know what will reset the system, but I’m afraid of some of the ways this might happen.
I think your timeframe for the stable period should have ended in the 60’s. Corruption has been growing within all ranks of government since that time. Vietnam was an act of corruption. Nixon’s white house was the most corrupt until Trump’s came into town. Corruption is now so widespread that we ignore and dismiss obvious signs of it as nothing of concern. Money controls DC, DC’s only objective now is to keep the money happy.
60’s followed by an acceleration of the gov’t dysfunction after 1992 election … then US gov’t dysfunction on steroids after 2016 election, and here we are…
My personal subjective view is the risk and uncertainty is at least as much to social order as it is to the markets. Could we continue to have a bull market in equities while having social and political chaos? I think we could…..I was not happy that the fed bought junk bonds ig bonds and cemented the complete takeover of funding for the martgage markets. I frequently ask myself where this stuff would be trading without the fed.