Can you smell the chimney money yet?

March Fed meeting

Fed Chair Powell performed well to a worried audience on Wednesday night.

He raised the federal funds rate by one quarter of one percent and estimated that the appropriate level for the rate would be 1.9 percent by the end of this year, implying there would be another 6 rises to follow.

“The Fed’s monetary policy actions have been guided by our mandate to promote maximum employment and stable prices for the American people. Our policy has been adapting to the evolving economic environment, and it will continue to do so. As I noted, the Committee raised the target range for the federal funds rate by 1/4 percentage point and anticipates that ongoing increases in the target range will be appropriate. The median projection for the appropriate level of the federal funds rate is 1.9 percent at the end of this year, a full percentage point higher than projected in December. Over the following two years, the median projection is 2.8 percent, somewhat higher than the median estimate of its longer-run value. Of course, these projections do not represent a Committee decision or plan, and no one knows with any certainty where the economy will be a year or more from now.”
Jerome Powell, 16/3/22

This was one of the expected scenarios and with a spoon full of sugar it went down a treat and so far it appears markets are happy to give up a little growth to get inflation under control 😁.

He did this while talking up the economy. And with careful, methodical and nimble moves on the back of a strong economy, he made it sound like the Fed’s got this in the bag!

Here’s the sugar:

“The Committee is determined to take the measures necessary to restore price stability. The American economy is very strong and well positioned to handle tighter monetary policy”
Jerome Powell, 16/3/22

On top of that, there was more sweetener 😉. He said that the Fed is alive to the European war and its flow-on effects into supply chains and prices, and implied that help evolve the Fed’s tightening ambitions. Phew!

“As we noted in our policy statement, the implications of Russia’s invasion of Ukraine for the U.S. economy are highly uncertain. In addition to the direct effects from higher global oil and commodity prices, the invasion and related events may restrain economic activity abroad and further disrupt supply chains, which would create spillovers to the U.S. economy through trade and other channels. The volatility in financial markets, particularly if sustained, could also act to tighten credit conditions and affect the real economy. Making appropriate monetary policy in this environment requires a recognition that the economy often evolves in unexpected ways. We will need to be nimble in responding to incoming data and the evolving outlook.”
Jerome Powell, 16/3/22

The market was pleased that Powell was not operating in a nationalistic vacuum.

OK, but so what 🤔?

We have lift off, finally, but is it too late and do supply shocks care about interest rates?

There’s still a big element of supply side here that can’t be fixed with interest rate hikes.

And even if rates could destroy sufficient demand to quell inflation - the economy would be fully carbonised toast.

The issue still remains as to whether the Fed can do as much as it would have you believe with interest rates and quantitative tightening (QT), particularly in light of the cyclical slowdown, and global debt servicing costs as we’ve previously discussed.

Nonetheless, bond yields did not stage a violent protest and equities were up. So too was oil and commodities as well as gold and bitcoin.

This is even in light of the high probability of a Russian default on USD debt repayments as a result of SWIFT and Russian central bank sanctions 🧨.

On the one hand there’s a wall of money and river of flow that’s looking to be treated better than a minuscule return from fixed interest. On the other, the market is also mulling over further downside from these and other wild cards:

Russia and Ukraine escalation versus de-escalation.
Whether Saudi Arabia prices oil in China’s Yuan and if so what effect that night have on U.S. dollars demand.
Whether China uses the Russian invasion as an excuse to invade Taiwan and take control of modern oil, i.e., the semiconductor manufacturing industry.

Geopolitical risk abounds and adds a new element to the macro lens.

But this should also be seen in light of the other spoon full of sugar for global markets and commodity exporters, this time from China. Vice Premier Liu He confirmed China’s impending support for Chinese capital markets. You will have noticed some massive price action in Chinese stocks in the U.S. sessions on Wednesday 🚀.

All in all, this week has calmed and removed some uncertainty, for markets.

Whether Powell got the right result for the wrong reasons, or the wrong result for the right reasons, should be better understood by the end of the year as the stagflationary slowdown bites.

A likely return to slow growth and chimney money would see the stage set for gold and other stores of value

We are already in a cyclical slowdown despite Powell’s bullish words. Hello ☕?

But what else could he say - he’s in a tight corner and has left it way too late to lift interest rates without some fallout. And as predicted, the ‘asset to consumer price inflation slingshot’ is playing out now, with COVID and Russia’s invasion of the Ukraine being the catalysts.

With U.S. inflation of ~8% he could be staring down the barrel of deeply negative real interest rates (-6.5%), negative real growth rates (-5%) and negative real wages on top of a slowdown, huge (and volatile) commodity prices and unrepaired supply chains. This together may reverse the otherwise low unemployment numbers. Basically, stagflation.

And while the USD strengthens right now as a result of interest rate hikes which may prove limited, the Aussie dollar will also likely strengthen if China’s stimulus comes back with a vengeance as per Liu’s impending sugar hit.

One works against the other - but a little higher Aussie dollar should be offset by higher commodity prices, so it may be Goldilocks for us here in Oz depending on how Governor Lowe decides to rig Australia’s carry in light of the Fed’s tightening.

In the medium term, it looks like the U.S. will see yield curve inversion by the end of the year as a result of Biden’s leaning on Powell to get rates up, along with a very slow global economy.

That along with tighter northern hemisphere monetary policy is likely to lead to additional household stimulus via helicopter money being dropped down chimneys to sooth food, fuel and other ‘asset to consumer price slingshot’ price rises - while Powell tries to fix his calculator and shrink his egregiously bloated $8.9 trillion balance sheet without fallout. Good luck buddy, you’re a bit too late!

But here’s the good bit for investors - if this is the way it plays out we should see some real strength in hard slow growth/dollar debasement friendly assets like gold, precious metals and crypto and perhaps some protection in certain long end of the curve bonds.

Green energy metals and commodities and strategic minerals are also likely to remain strong for other obvious reasons, but I think will remain volatile due to demand/supply imbalances and economic conditions later this year.

So, the set up for gold, crypto and other stores of value remains compelling 🦄

Stay tuned, and keep an eye out for those chimneys, because they will signal a changing golden narrative.

Mike

Michael GanonMarch 18, 2022#economy, #finance, #interestrates, #business, #trade, #transformation, #strategy, #ceos, #cfos, #c-suite, #currency, #construction, #mining, #renewables, #technology, #leadership, #india, #china, #australia, #perth, #education, #research, #uk, #growth, #retail, #businessowners, #future, #brexit, #nextlevelcorporate, #mikeganon, # community, #tradewar, #America