By Eric Peters, CIO of One River Asset Management
Hope all goes well… “For as long as we’ve been trading, every time stocks fell hard, you knew they’d step in and cut rates,” said the CIO, describing the Fed Put. “But with the kind of inflation we’re seeing now, there’s no way the Fed can cut rates just because stocks fall,” he said. “Even if the S&P were to puke 25% in a week or two, the best you could hope for from the Fed is some kind of statement saying they’ll slow down, maybe pause.”
US stocks had just finished lower for the 5th consecutive week. “What we’re seeing is the market pricing out the Fed Put. We’re on our own now, without a safety net. It’s a sobering reality, a bit like trading crypto.”
“Our plans and policies have produced the strongest job creation economy in modern times,” declared Biden. “The unemployment rate now stands at 3.6% - the fastest decline in unemployment to start a President’s term ever recorded,” he boasted. “There have been only 3 months in the last 50yrs where the unemployment rate in America is lower than it is now – a direct result of the American Rescue Plan, our COVID vaccination program, and my plan to grow our economy from the bottom up and middle out.”
No one could’ve known exactly what would happen when Biden signed into law the $1.9trln American Rescue Plan in March 2021. Now we do. “Inflation is much too high,” said Powell, following his 50bp rate hike, and describing plans to reduce the Fed’s $9trln balance sheet.
“We understand the hardship it is causing, and we’re moving expeditiously to bring it back down,” pledged the Fed Chairman. “We have both the tools we need and the resolve that it will take to restore price stability on behalf of American families and businesses.”
The essential tool the Fed has is its ability to create slack in the labor market through forcing people out of work, undermining their position when negotiating higher wages. But higher wages and narrowing inequality are precisely what the administration wants from America’s hot economy.
So begins a new conflict in a world of rapidly expanding hostilities. For decades, the disinflationary tendencies that accompanied rising levels of globalization, slowing working-age population growth rates, and accelerating microprocessor processing speeds, allowed central banks to act in general support of fiscal stimulus. In each cycle, their stimulus ratcheted up as our central bankers probed for the point at which their expansive policies would spur runaway inflation, wage-price spirals, hoarding, debasement. But they never found it -- until now that is.
In that previous paradigm, stocks and bonds generally rose together. Even better, when the former temporarily declined the latter rallied. What replaces it will look far different. And we are only now getting a glimpse.