Fed chair Powell’s folly continues. It’s quite the body of work. First problem was doing nothing in 1Q22 as inflation was rising and the Fed kept money printing/bond buying. Second problem was initiating rate hikes too little and too slow in 2Q. Now the problem is Powell talking tough and raising rates while money supply growth slows, the economy weakens and inflation cools. It’s going to be near impossible to negotiate a soft landing for the economy. Global short rates are rising, and the economy is braking hard and fast. When I was taught to do a driving three-point turn, I was taught to come in slow, measure up, and look both ways. The Fed is trying to do a three-point turn on the economy by coming in +80mph, jamming on the brakes, and spinning backwards somewhat blindfolded. That’s how accidents happen.
Last week’s data that the Fed did NOT talk about was the direction of rents (appear to have peaked and headed lower), money supply growth (now near zero), used car prices (down -13% from the peak), and shipping freight rates (now down -55% from the peak). The next weakness will be in the labor market. Layoff announcements on the rise. The unemployment rate is headed higher. Strangely the market doesn’t get better until a bad labor report or two cause the Fed to “pause”……but labor weakness is approaching and approaching fast.
Remain buckled up – and stay away from high yield bonds. It’s where all the defaults will occur. We’ve been away from them for a while and remain so. It’s a likely candidate for permanent loss.
Chief Investment Officer
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