As markets brace for the Fed’s rate decision tomorrow 2pm EST (+75bps overwhelming consensus…it’s already priced in and known), economic demand continues to be destroyed and inflation expectations are falling. Gold down -18% over past 8 months, lumber prices down -65% over past 8 months, shipping freight rates down -52% over past 8 months. Tighter financial conditions – most notably higher risk-free yields and a strong USD – are destroying economic demand across the board. Inflation is coming down and it’s coming down quickly.
If the period March 2020 to December 2021 was the Golden Age of Quantitative Easing (absurdly loose monetary policy), 2022 has quickly turned into the Dark Age of Quantitative Tightening, and it’s not just about the Fed hiking rates. The QT we are seeing now is a synchronized, coordinated plan to destroy economic demand. It’s the Fed hiking rates, it’s a sharp decline in Federal outlays, and it’s the Fed shirking its own bloated balance sheet. The charts below tell the full story. Liquidity is being sucked out the system at an historic pace. The economy is slowing, and inflation is coming down. Like it or not, despite being very, very, very late to act the Fed and these combined activities are bringing inflation down.
Consumer sentiment is already at multi-decade lows. Rent gains are slowing dramatically. Labor will be the last to fall but it likely falls this fall. The shock of a negative monthly job report will likely force the Fed to utter the most magical phrase of all: “we’re taking this opportunity to pause”. “Pause” will mean “go”, both for the economy and price and trajectory of risk assets.
Remain buckled up – and stay long.
Chief Investment Officer
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