📈 Jerome Powell - Demolition Man
MBMG's Paul Gambles spoke with Bloomberg’s Doug Krizner in New York - could the worst January turn into a longer lasting, bigger problem?
Paul explained that the real danger with the Fed’s Hawkish stance (stating its intention to raise interest rates and shrink its balance sheet) is that ;
“Actually we're seeing slow down all already. There are the first signs that there's a fairly dramatic slowdown, which probably started during, Q4, and certainly current and leading indicators are showing it so far this month. So the real danger is not that the Fed’s actions will necessarily, create slowdown, but there's an a nascent slowdown already, which policy is going to exacerbate dramatically. You really don't need to be hiking rates or talking about hiking rates ‘as many times as necessary’ as Powell did. ‘As few times as the market can stand’ would be a much better dictum.
Asked whether slowing growth would dissipate the inflation and therefore whether Fed policy was unnecessary," Paul was unequivocal
Definitely. A very, human heuristic that we're all susceptible to, is that we tend to take the most simplistic explanations, the most obvious explanations of why things are happening, which are often wrong. To a man with a hammer everything looks like a nail and to the Fed, every form of inflation looks like an excessive demand problem. But in this case, it's not, it’s really a classic supply chain issue, a supply shock.
There are clearly signs that it's already moderating. Supply shock inflation tends to come and go in waves which dissipate and ultimately normalize again.
Timber was something that got a lot of people's attention last year. We were looking for what the second supply-constrained price spike in timber would be and it came in recently way lower than the first spike was. So that shows us that, that it's dissipating it and the original prescription of transitory inflation was correct people.
I think just misunderstood that transitory can mean for a longer period than perhaps many people assumed and that it can run waves as well. I think that transitory inflation is going to play itself out probably over this year, but the timing is hard to estimate. But while we can see that there's weakening in every successive wave, we really shouldn't be worrying about inflation at all.
Paul added that the supply shock inflation, to such extreme levels, has primarily been a US phenomenon.
Because obviously the USA is the major economy in the world and because the Fed is the primary policymaker, we've all got a little bit obsessed with the US story, but actually inflation is primarily a US story. If we look at the rest of the world, most of high inflation in other countries is a weak currency or an idiosyncratic supply chain issue. American policy supported demand during the supply chain disruption. Now that the supply chain is getting back towards normal, that policy is looking to reduce demand.”
From where we’re sitting, the Fed seem determined to make a huge policy mistake, for which the consequences could be extremely costly, which seems almost certain to result in the worst January on record for stocks and lasting pain for the American economy.
In case you missed our most recent posts, please find the link below:
