I’ve got a different narrative, and different appetite for risk.
So as I noted yesterday, share markets the world over are wobbling because there’s been a shift in the ‘narrative’.
Gone is the old narrative that you could pay an infinite amount of money for stocks because rates would remain infinitely low forever.
That’s turned on a dime. Inflation is back and rate hikes are around the corner. People have paid too much (Tesla longs looking at you), and a correction in inevitable.
That the narrative that has the upper hand right now, but there’s a couple of holes in it I reckon.
First, while inflation is back, I’m not convinced it’s “persistent” yet. Rather, the inflation we’ve got is from an enduring run of supply shocks. Supply chains are still a mess, and Covid is keeping large swathes of people out of the work-force.
It’s not clear to me yet that we have enough heat in the underlying economy (particularly here in Australia) to turn this into the runaway inflation we saw in the 1970s.
It wouldn’t surprise me if we hit mid-year and realise that inflation is nowhere near as persistent as we thought it was, and the case for raising rates isn’t as pressing as we thought either.
Second, I wouldn’t be surprised if markets cut the Fed off at the knees. That is, the Fed might only get one or two hikes into their ‘normalisation’, and it will create so much carnage in financial markets that the Fed just has to hold fire.
We live in an era where massive leverage is the norm. Even small rate hikes will be enough to freak markets out and cause indices to drop.
I just can’t see the Fed ignoring pain and wealth destruction in markets and pushing ahead with their normalisation regardless.
One, it’d be unproductive, since it would kneecap the very economy it’s supposed to protect. And two, it’d be political suicide. The Biden administration would be furious.
So I don’t’ think the narrative that says the Fed and all central banks are on a path to normalisation is right.
Rather, I think we’ll get a head-fake from the Fed. It will hike rates. Maybe once, maybe twice. But then it will soon realise that it’s looking at an economy tilting toward recession, with very weak prices impulses coming through the system.
And so it will stop.
If that’s true, what would that mean?
Well, it means that share markets are probably going to slide through the first half of the year. But then they’ll find their feet mid year as the Fed realises their mistake.
It will probably be about the same time as we realise that we’re getting on top of Omicron better than we thought too.
I reckon this will be a buying opportunity. Particularly for reopening stocks. Airlines, travel, retail.
I expect growth stocks and the market darlings to take a bit of a hammering through this period.
But I reckon that could create good opportunity for higher-quality growth stocks – Apple, Amazon.
From there, as the Fed sits on its hands and the dust settles, I reckon the legacy of massive money printing will come to the fore.
Remember, there has been a dizzying amount of money that has just been pumped into the financial system.
That’s going to have an impact. A long, drawn out impact.
I think the parallel here is 2013.
Remember, in 2013, the Fed started reining in its money printing, which it had been running since the GFC.
Markets had a ‘taper tantrum’ and the Fed paused.
Markets lost a little ground, and then went higher… and higher and higher.
By 2020, they had doubled on 2013 levels:
This is what I reckon we’re looking at – a temporary pause, and then a long grind higher.
That’s my best guess.
I know there are a lot of variables in the mix, but that’d be my central scenario.
It’s why I’m not ducking for cover right now, or freaking out.
I reckon it will be a rough couple of months maybe.
But all markets – from stocks to property – are still ripe with opportunity.
JG.