The big names were out and about on the eve of what’s widely expected to be the largest Fed hike in decades.
As is custom, they (the big names) indulged the media with headline-friendly soundbites.
“You can’t think of a worse environment than where we are right now for financial assets,” Paul Tudor Jones told CNBC. “Clearly you don’t want to own bonds and stocks,” he added.
That’s certainly been true over the past several months. Q1 was disastrous for equities and even worse for global bonds, which in April posted the largest monthly decline on record (familiar figures above)
Still, dire soundbites from “name brand” investors and economists invariably conjure comparisons with historical instances of industry titans resorting to hyperbole to make a point.
Listening to Jones, I was reminded of Stan Druckenmiller’s infamous assessment, delivered two years ago this month. On May 12, 2020, during a virtual chat with the Economic Club of New York, Druckenmiller said “the risk-reward for equity is maybe as bad as I’ve seen it in my career.”
Not to put too fine a point on it, but that pseudo-call was… well, “maybe as bad as I’ve seen in my career,” as were multiple similar predictions from Jeremy Grantham, who doubled and tripled down as stocks ran higher and higher on the way to the single-most spectacular rally in modern history (figure below).
Do note (and I always try to mention this whenever I updated that humorous visual): I’m not suggesting Druckenmiller or Grantham need “validation.” Their place in the hall of fame is cemented. I use “validate” in the context of the post-pandemic rally.
To his credit, Jones is typically more palatable than most big names, or at least I’ve always thought so. His remarks to CNBC, while bombastic and plainly designed to grab as much attention as possible, were at least worth the air time.
“I think we’re in one of those very difficult periods where simple capital preservation is the most important thing we can strive for,” he went on to say, before suggesting that in his mind, this may not be a time when “you’re actually trying to make money.”
Recall that 60/40 portfolios just witnessed one of the worst stretches ever (figure above).
Somehow, I doubt Jones has given up on making money. His point was just that stagflationary environments are difficult to navigate.
Meanwhile, in an interview with Bloomberg TV, Kenneth Rogoff said the Fed will likely have a difficult time reining in inflation with just 300bps of rate hikes. “I think they’re going to have to raise rates to 4% or 5%,” Rogoff said, before conceding that nobody knows “exactly what needs to be done.”
Rogoff was clear on one thing, though. “Things are way out of control,” he told Lisa Abramowicz.
If we get to 4 or 5% on Fed Funds I think we’ll be talking about depression and QE4ever in 12 months (especially when inflation numbers are comp’d). I’m not even sure this economy can handle 3%. Imagine what companies will do with hiring, layoffs, wages, investment, etc if their stocks are down 20, 30, 40% more. This so reminds me of the Bernanke moment in 2007……………………………………. Imagine what housing prices will do with higher mortgage rates and most people’s down payments evaporating (as stocks face mult compression and declining earnings). Though the economy is in a better place, and balance sheets are in better shape (in general) execs will still focus on their stock comp so I expect a major retrenchment while the the vast majority of workers once again feel the brunt and the hollowing out of the “middle class” continues once again. Core CPI, PCE will likely be posting negative numbers for a time in 2023. Stephanie Kelton might just be talked about once again………………………………….
This is exactly why I have decided to stay invested. I think our economy, inflation, interest rates, employment will, one way or another, normalize in less than 12-18 months and the stock market will start responding to that in advance.
In my mind, “normalize” means monetary and fiscal largesse- as things looked prior to covid- when US government was spending about $1T more than they collected in revenues and interest rates were kept low.
If job openings do not get filled- we are going to have to finally adopt an immigration policy that intelligently responds to the country’s needs. We also might have to drill/frack and finally establish a plan to transition to renewables/nuclear.
I would vote for (almost) anyone who prioritizes making these things happen.
The range of outcomes is wide, given what is going on in the real world. The longer I invest for a living the less I know for sure.
This will sound extreme but I don’t think we will ever get back to the “normal”, pre-COVID19, pre-Ukraine world.
Investing for the long term, anything greater than 5 years, feels too risky.
What if, instead of purchasing bonds, the fed purchased mRNA vaccines and gave them to China? Of course Xi jinping would not accept that, but that would be the most cost effective way of addressing inflation in goods and ” normalizing ” the supply chain.