I know the saying “markets can remain irrational longer than you can stay solvent”, I have to say that’s never rang truer than this bear market but curious from a bull’s perspective – what is bullish?
Many bulls are betting on a pivot toward the beginning of next year once a recession becomes evident. For two years it was constantly repeated to “not bet against the Fed” and now Bulls are doing exactly that. They have no clue if the Fed is going to back off at the end of this year, in fact Powell isn’t signaling he is going to at all. To me it appears they are just hoping they do. With the bond market holding at approximately 2.7%, the Fed only has to hike one more time and basically be done. I don’t foresee 2.7% to hold as further inflation readings come out.
But let’s say he does pivot – how does that benefit the economy? There’s no way the rate hikes that have been implemented are doing enough damage to inflation to suggest that QE would be a good idea next year. If they lowered rates only a year after starting, that would just further lead to a stagflationary environment where consumers will continue to be priced out of everything – leading to another inevitable inflationary recession or the prolonging of the one we are entering. It would be a bandaid on a much bigger wound that needs adequate medicine – a hardcore high unemployment recession.
Without high unemployment inflation can not go down. It’s simply not possible. They need to push people out of work in order to conduct true demand destruction. We have started seeing hiring freezes and slight layoffs in certain companies, but nothing in terms of the magnitude to adequately conduct demand destruction. I firmly believe Powell won’t back off until he sees higher unemployment. He consistently repeats that the labor market is strong and is suggesting we aren’t going into a recession, so if that’s true how is that bullish? If anything he’s stating how strong things are and it gives him even more of a reason to hike. He reiterates the same thing over and over – we have a strong labor market.
So to me we get two options: either a Fed that hikes into a recession and high unemployment and he meets his goal of demand destruction to tackle inflation or he pivots and further contributes to higher inflation and leads to a recession anyway. I am a bull long term, but the current times mimic the depression. The roaring 20s were due to QE after the war (this time COVID), unchecked speculative investing and inflation, and a behind the curve Fed that started tightening into a recession. Earnings also haven’t been looking great, with big companies like Google, Microsoft, and Meta missing. Apple is up tomorrow as well and I anticipate a miss, especially after seeing Walmart’s atrocious miss. So genuinely curious (and not looking for hate, I am a bear short term but bull long term) – what is bullish?
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