Is Powell dovish or hawkish? The answer is he is both. And it’s intentional. Part of the Chairman is looking in the rear-view mirror (strong jobs, GSP growth, wage pressure and inflation); and part of him is looking ahead (weaker growth; falling jobs; lower inflation). He straddles both sides. But what she he pay more attention to? The answer is the latter – but he can’t ignore the former. That said, I also think the Chair’s choice of language was interesting. He believes above trend growth and strong jobs are what’s causing inflationary pressure – maybe in part. But I will argue it’s the lagging effect of monetary policy… when you increase money supply by 40% in just 2 years.
"Interest Rates / Bonds"
Rethinking Asset Allocation
Last week we were treated to another thought provoking memo from Howard Marks. Apart from Warren Buffett and Stan Druckenmiller – very few investment managers boast a better 40+ year record than Marks. These investing legends rarely speak. But when they do – pay close attention. Marks’ note was follow-up to his previous memo titled “Sea Change”. Here’s the TL;DR: investors need to re-think their longer-term investment strategies. He is of the view the next decade (or more) won’t be the same as the last. A rising tide is unlikely to lift all boats. However, this also brings meaningful new opportunities for double-digit returns. We just need to start looking in different ‘pockets’.
Sticky Inflation Equals Sticky Rates
If we needed a reminder on how persistent some components of inflation are – we got it this week. Core consumer price inflation (CPI) remained more than double the Fed’s target rate – with rents surging to 0.65% month-on-month. And whilst both headline and core were largely inline with expectations, inflation remains uncomfortably high. As soon as the CPI numbers hit the tape – probabilities of an additional 25 bps hike went up. Markets had not priced that in. What’s more, the probabilities of rate cuts next year dropped. It’s premature to conclude the Fed has hit their terminal rate…
One Case for Bond Yields Falling in 2024
It’s been a horrible 3-years for bond / fixed income investors. In short, they have been slaughtered as yields shot higher. For example, losses in long-maturity bonds (e.g. greater than 10 years in duration) are close to historical levels. Consider the all-important US 10-year treasury…. an asset which underpins every financial asset. It has plunged 46% since peaking in March 2020. Put another way, these yields went from ~0.5% at their lows to ~4.8% last week. What we’ve seen in the bond market is one of the most severe market crashes on record. 30-year bonds have plunged ~53%. As a parallel, the equity market crashed 57% during the 2007-09 financial crisis
For a full list of posts from 2017…