Notwithstanding a tough session in Asia, there was no sign of an out and out global meltdown Wednesday, following Wall Street’s worst day in two years.
As some were quick to point out, Tuesday’s losses for US shares on the heels of another dire inflation report merely erased gains from the previous four sessions, when stocks rode a wave of mechanical flows to a rebound from a three-week slide.
Nevertheless, it’d be foolish to downplay the rout. It could just as easily continue over the balance of the week as not. Although calls for a 100bps rate hike from the Fed next week may evaporate as quickly as they did the last time the idea was bandied about, it’s important to remember that the Bank of Canada has already implemented a 100bps hike this cycle. I’m not suggesting Canada is a bellwether, but as many pointed out in July, the BoC’s move did raise the subjective odds of a full-point move from the Fed — 100bps wasn’t taboo anymore.
Larry Summers likes the idea. “I don’t think there is any substantial probability in the US that this episode can be managed without rates being raised to close to 4%,” he said, arguing for more aggressive front-loading. “It has seemed self-evident to me for some time now that a 75bps move in September is appropriate and, if I had to choose between 100bps in September and 50bps, I would choose a 100bps move to reinforce credibility.”
He’s not wrong. Which is about the best compliment you can give an economist. Remember: This isn’t about whether the Fed can or can’t mechanically impact supply factor inflation. They can’t. Not to any significant degree anyway. Summers won’t concede that, or maybe it’s more apt to say he doesn’t feel obliged to concede it because in his view, demand (i.e., stimulus, and particularly fiscal stimulus) is at least as large a problem as supply. But that’s not especially relevant here. The Fed has enough problems. They can’t risk even the appearance of dereliction. A full-point move would, if nothing else, make it virtually impossible for anyone to argue they’re still derelict. That line of criticism would be off the table if they moved 100bps. And that’s not nothin’.
For what it’s worth (so, very little), Jeff Gundlach isn’t thinking about hiking 100bps in the alternate reality where he’s Fed Chair and purple corduroy suits are a good idea. In that world, Fed Chair Gundlach is likely to go with 25bps next week in order to reduce the risks associated with over-tightening. That’s according to Gundlach’s latest CNBC interview which I can’t in good conscience recommend, despite the comedic value associated with (another) clownish wardrobe choice. Spoiler alert: He thinks stocks might fall some more. And if they do, CNBC will invite him back on in a month or two so he can say he was right. Millions of investors will watch and dutifully nod their heads: “Yep, Gundlach was right again.” If he’s wrong, nobody will notice.
Gundlach, like Cathie Wood, believes deflation may be a bigger risk at this point than inflation. On that, at least, I’m sympathetic to the argument, even as I’m not totally swayed. Gundlach was surely correct to suggest the Fed hasn’t had enough time to assess the impact of rate hikes already delivered (figure above) to make an informed decision about how much extra tightening is needed. The Fed itself would agree. But time isn’t something they have a lot of currently.
In any case, that’s (more than) enough Gundlach. I’d remind readers that Gundlach interviews and related coverage from the financial media (mainstream and otherwise) are pure entertainment. Whatever value he genuinely intends to deliver is lost in the media’s zeal to monetize Jeff and his costumes.
Looking ahead, I’d reiterate that equities probably need to de-rate further to realign with US real yields. I talked about that at length last week in “A Real Issue,” an article Bloomberg xeroxed on Tuesday, right down to the Goldman chart, which they could’ve recreated on the terminal, if they’d just put in a modicum of effort. They grabbed some Christian Mueller-Glissmann quotables to help make the point.
“There are very few assets that do well with rising US real yields due to the Fed fighting inflation, outside of the dollar,” Mueller-Glissmann said.
Five-year reals breached 1% Tuesday (figure above). That’s not compatible with… well, with anything to be honest.
That sort of parabolic ascent for reals will undermine everything from equities to commodities to crypto to gold. As Mueller-Glissmann alluded to, the only thing that works when US reals are trekking higher is the dollar.
10 thoughts on “Economists, Celebrities And Reals”
I can’t believe I’m writing this, but I would be all for chair Gundlach’s approach and purple corduroy suits at this point, whatever the Fed breaks this time will be a lot harder to repair and will give a bigger edge to demagogues around the globe. I will gladly wear purple corduroys if we can avoid the demise of our allies and the return of the Don.
You may not like Gundlach, he is not the most likeable character. But Danny Blanchflower has some credentials here and this is his take. I happen to largely agree with him, though I am more in Gundlach’s camp. The optics of a Fed halt at this point is too risky. But they really need to slow down…..
It’s not that I “don’t like Gundlach.” It’s that anything you hear from any of this people in public is irrelevant because they’re just doing it to be on TV and the only reason CNBC wants them on TV (or Bloomberg wants to interview them) is because this is a business. A media business. When you engage with it, either by reading Bloomberg articles (other than the stuff that’s on the terminal), or watching CNBC, you’re not an “investor.” You’re a consumer. You’re being monetized. If you want to know what Gundlach thinks, you need to figure out a way to get invited to a party he’s at and speak to him in private or be a client. The only thing you’re going to get from listening to him in public is a bunch of made-for-TV / made-for-press soundbites because, again, this is a business and you’re the customer.
Very much agree. Discussions here and personal experience of loss and gain have much more value and help me to gauge the quality of my gut, inform my risk tolerance and investment decisions. CNBC is an utter distraction that I turned off in 2001. Bloomberg TV has more value, but it’s still not worth the investment of my time.
Maybe a better description would be you are the product. Who’s paying the bills? Not the viewer.
The GFC and a subsequent career change turned me from a minuscule active investor into more of a passive observer, but even I figured out that these folks are full of hot air. The first thing that really struck me, especially if you tune into CNBC during the trading day, is that hardly anyone ever mentions timeline. If you’re savvy enough to parse that from the conversation, that’s one thing, but I’d say there are a lot of viewers who just don’t get that the scale and timeline that the talking heads are into are too vastly different from your own.
When out in public, as a consumer, it just really doesn’t feel like a recession. A slow-down yes. But a situation out of the Great Depression no. The struggle to get by is a little tighter but I don’t sense a panic at all.
There are no long lines in today’s world like there were in the 1930s, but the cage holding the poor is no less strong. This winter is not going to be good for 15-20% of our population who lack housing, food, and energy security. There would be more lines now, but there are no good places to line up.
I do realize that I’m in one of the top markets in the country, being that I’m literally across the river from Manhattan. But I’ll agree with Tom, above. I’ve been waiting to see people ‘trade down’ in my wine shop, but the bottom shelf is still languishing while people spend up for the inflation-adjusted higher end goods like crazy.
I like your comment. I do not imagine that people with real money in New York or Chicago or LA are impacted at all by the current market state, though they may be lamenting paper losses. Bottom line, they’ be fine just riding the wave to recovery.
One difference in this cycle is that the world is changing. Russia is going down. Ukraine, no longer a Russian satellite, is rising. As is NATO. And if all goes well in the next five years, oil will be less of a thing and green energy will be more clearly evolving and getting closer to realization. I expect we’ll also be constructing new and much safer nuclear plants.