“There is no prospect for a material reduction in inflation unless the Fed aggressively raises rates, or the stock market crashes, catalyzing an economic collapse and demand destruction,” Bill Ackman declared, in a barrage of Tuesday tweets.
Ackman’s somewhat bombastic proclamations were gas on the fire. US shares were already under pressure thanks to the extremely pernicious combination of i) Snap’s shock guidance cut, ii) a stunning collapse in new home sales, iii) more cautious commentary from retailers and iv) poor PMIs.
The Fed has, of course, committed itself to the inflation fight, but there’s widespread disagreement about the proper scope for policy tightening into the teeth of a decelerating economy. The familiar figure (below) gives you a sense of what’s expected in terms of rate hikes in 2022.
Obviously, market-implied pricing is dynamic. The chart simply assumes 50bps hikes in June and July, followed by 25bps moves at each meeting through year-end.
Some argue the combination of ~250bps of rate hikes in 10 months and balance sheet rundown is guaranteed to tip the economy into recession, and that may be precisely the point. The US, the theory goes, desperately needs a little demand destruction.
But Ackman warned that if Jerome Powell doesn’t do a lot more, a lot faster, the US will get more than “a little” demand destruction. The economy, he mused, will do the Fed’s job by promptly imploding.
He seemed particularly vexed with remarks from Raphael Bostic, who on Monday suggested the Fed might “pause” rate hikes in September to assess the impact of what, by then, should be 175bps of tightening (plus whatever balance sheet rundown equates to).
“In the last day or so, various current and former Fed members have waffled and made dovish remarks proposing a modest increase in rates and a pause in the fall,” Ackman chided, on the way to suggesting the Fed should immediately hike rates to neutral to send a message.
The rest of his Tuesday missive is below. I present it without additional editorializing.
If the Fed doesn’t do its job, the market will do the Fed’s job, and that is what is happening now.
The only way to stop today’s raging inflation is with aggressive monetary tightening or with a collapse in the economy. With today’s unprecedented job openings, 3.6% unemployment, long-term supply/demand imbalances in energy, agriculture and food, housing, and labor, and with the wage-price spiral that is underway, there is no prospect for a material reduction in inflation unless the Fed aggressively raises rates, or the stock market crashes, catalyzing an economic collapse and demand destruction.
In the last day or so, various current and former Fed members have waffled and made dovish remarks proposing a modest increase in rates and a pause in the fall. The Fed has already lost credibility for its misread and late pivot on inflation. There is no economic precedent for 200 to 300 bps of fed funds addressing 8% inflation with employment at 3.6%. Current Fed policy and guidance are setting us up for double-digit sustained inflation that can only be forestalled by a market collapse or a massive increase in rates. That is why I believe there are no buyers for stocks.
How does this downward market spiral end? It ends when the Fed puts a line in the sand on inflation and says it will do ‘whatever it takes.’ And then demonstrates it is serious by immediately raising rates to neutral and committing to continue to raise rates until the inflation genie is back in the bottle.
Stocks (of real businesses) are cheap once again. Markets will soar once investors can be confident that the days of runaway inflation are over. Let’s hope the Fed gets it right.
He must be short
“When the book is Red, blame the Fed.”
Bill Ackman has a very good rear view mirror. The stock market and housing have, and continue to, crash.
Hmmmmmmmm.
So what about the 50s-60s people that will lose their jobs in the Fed induced crash (inflation busting program)? Will they ever find a job paying the same as they had after the dust clears?’
What do companies do when their stock prices are down and there is concern about profit margins? Tight labor markets are tight until they aren’t.
How much of this inflation is really going to be around in the next 12 months? Even IF jobs are not lost at great rates. 401K statements will shock, more discussion of housing prices “issues” will make people think. Then add in CEO actions to “save their stock” through cutbacks (job losses). Already there is concern about spending for a few reasons (pulled forward demand, overspending, inflation, etc) but job loss and for many wealth loss will guarantee spending pullbacks.
Where was Ackman in late 2021? Or early 2022? Or how about mid 2021? Maybe he was warning, I don’t think of him for advice, but why wasn’t he screaming when it was (more?) timely?
I am not sure if he is “talking his book” or not but I am not sure his cure now will help the patient. For a billionaire (or centi-millionaire) I don’t think any of this really matters. For the other 333 million citizens it just very well may.
There is no question the Fed induced bubbles. There is no question they were too late in curbing the negative aspects of them. But to do a 07/08 now is that the best path? Do we not learn from history? Do we want another lost decade (or more)?
Of course market participants (as Ackman correctly points out) do have an impact as always (remember HF trading in commodities in 07 and CDSs during that time?) Sentiment can overpower and stepping in front of a steamroller is career risk. A “bank run” can take any healthy, strong bank down in a short time. Reflexivity is an extremely powerful force. That is why the Fed should be (have been?) very careful.
Remember the mistakes of 07/08…………………………………………………..
Speaking as a non-economist, I don’t think monetary policy is the answer. We have high inflation in the things that matter to common people: the cost of rent (or mortgage), food (groceries), services, and gasoline (transportation). Some of these are out of our hands, in the short term anyway. The cost of oil will stay high, and limited refining capacity will keep gasoline, diesel, and jet fuel prices high even relative to oil prices. Food prices are high at least partially because of Putin’s war on Ukraine, along with weather events in India and elsewhere. Rising interest rates will not help people afford to buy a house, and will not lower their rents. Housing demand is to a large extent driven by the demographics of Millennials coming of age. So yes, you can destroy demand for services, and you could lower the demand for energy with a deep recession, but this is like curing an ill patient by administering cyanide. What an enlightened society would do is change policies. Create elder communities and subsidize healthcare and assisted living so that aging baby boomers will leave their 4 bedroom, 2500 sq ft houses (with a low tax basis) and sell them to younger people. Adjust mortgage interest deduction rules with phase-outs. Cut demand for gasoline and diesel by encouraging working from home (but think it through so that people don’t burn through AC and heat in their own houses; perhaps subsidize working from shared offices close to where people live). Incentivize working four 10 hour days instead of five 8 hour days. Give free bus or transit passes. Use informatics tools to figure out where people could use transit and then send subsidized express busses (as companies like Google, Facebook, etc do running between SF and the peninsula). Incentivize people to carpool.
Basically, you need to treat the economic, environmental, demographic, and political challenges that we face as a war. We were really good at wartime logistics in WWII, and patriotism also. We need to convince ourselves that we are fighting for the survival of America–which we are. And then take the necessary steps.
Good thoughts.
Joey, by the way, we are at war…
Ackman says Fed must add over 250 fast, or disaster.
Minerd says Fed must not go over 175, or disaster.
My gosh, what should the Fed do?
Maybe a reasonable answer is .
Pragmatically, investors should focus on sussing out what the Fed “is going to” do, not what the Fed “should” do.
Getting the former right can help our decisions, more directly than getting the latter right.
Anyway, how would one ever know if one had gotten the latter right? Unlike TV pundits, we know that we will never know what would have happened if the Fed had only known to listen to us.
Oops, after “a reasonable answer is” there was supposed to be “[shrug]”.
Nobody knows anything. All of this stuff is inherently pointless at the most basic level. We’re talking about trying to tweak a policy rate in order to herd 330 million cats, all of whom have their own agency, their own economic goals, their own daily priorities and their own views about what makes life worth living in the first place.
Not sure why he’s got his knickers in a knot. If “crashing stocks” is on the critical path to cooling inflation, The Fed is doing a swell job of it.