After more than a decade of low interest rates, the Federal Reserve has changed course.
Fighting inflation is the New Black.
Take heed.
Forewarned is forearmed.
This year, Fed Chair Powell has repeatedly said that he will do whatever it takes to control inflation. This is a 180 degree reversal of what has been Fed policy for almost 40-years.
If inflation is out of control, you can’t do anything with the economy.
Since the 1980’s the Fed has juiced the markets at the slightest sign that asset prices were under pressure. For financial markets this became known as “The Fed Put.” The concept behind the Fed Put was that every hiccup in financial markets would be contained with more free money and lower interest rates.
They've been able to do this because inflation wasn't an issue.
For 2-generations of investors this has been the only reality.
Buy the dip. Stay fully invested. There is no alternative.
And it worked.
But it’s a new game now. Inflation is behind the sea-change.
Powell has backed his talk with decisive action. This year he has increased interest rates at the fastest pace in 40-years. Home mortgages have more than doubled and recently hit 6.5%.
Inflation officially hit 9% earlier this summer. It remains stubbornly above the Fed target of 2%. Some analysts say the real rate of inflation is much higher.
The immediate result is that stocks have been hammered; bonds have been crushed and real estate has begun to roll over.
Investor optimism is fading as higher consumer prices and lower asset values have wreaked havoc on your hard-earned wealth.
One estimate is that $9 trillion in consumer wealth has already evaporated.
In spite of Powell’s direct talk, the narrative continues to be that the Fed will soon pivot and the good times of free money and low interest rates will quickly return.
We disagree.
The Fed’s interest policy may impact credit markets but these three inflationary trends are beyond Fed control.
1. The global supply chains: The pandemic exposed the fragility of global supply chains. Supply chain sustainability based on reshoring is an expensive long-term project.
2. The politics of energy: Energy policies have ignored the realities of the carbon-based global economy. Energy will be increasingly expensive into the foreseeable future.
3. The end of globalism: Globalism is over and Realpolitik is back. Russia in Ukraine; China in Africa and South Asia; The EU facing structural decay; The US return to isolationism. Commodities will become increasingly costly.
These expensive global trends are beyond the direct control of the Fed.
But the Fed can control demand-pull inflation with higher interest rates.
Unfortunately, this may mean that the Fed continues to increase rates until something breaks.
Don’t let higher interest rates break your investment portfolio or your retirement nest egg.
The information contained in this Higgins Capital communication is provided for information purposes and is not a solicitation or offer to buy or sell any securities or related financial instruments in any jurisdiction. Past performance does not guarantee future results.
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Ray Higgins
San Diego