The Morning Call--Patience is still a virtue

 

The Morning Call

 

8/1/22

 

 

Over the past month in my notes, I have posed two questions, the answers to which I believe would likely determine the course of the economy and Market over the intermediate term:

 

1.      how deeply embedded is inflation in our economy?

 

2.      given the answer to 1., how firm will the Fed remain in its policy decisions to bring the inflation rate back to acceptable levels?

 

In addressing the latter issue, I noted: Unfortunately, the turd in punch bowl is that the Fed does not have well documented history of courage.          Given Powell’s narrative (dovish if you have been living under a rock) following last week’s FOMC meeting, I assume that that turd remains in the punch bowl. One can hardly be surprised. But it puts investors back in the same territory that existed when Powell et al were swearing that inflation was ‘transitory’, i.e., buying the dips on the premises that (1) the Fed knew what it was doing and/or (2) its third mandate was to not let the stock Market plunge [the Fed ‘put’].

 

The problem is that we don’t have the answer to 1. To be sure, there is an argument to be made that many of the conditions contributing to the move up in inflation are one off events (China lockdown, Russia/Ukraine conflict) and once resolved, things will return to normal, and we will all live happily ever after. I can’t say that won’t happen. On the other hand, I can’t say that it will.

 

So for me, it is too soon to make an investment call (chasing the current rally) based on the lack of clarity in the fundamentals. Indeed, given history as embodied in the recent ‘transitory’ episode, it makes no sense to me that stock prices are spiking because investors again believe in the Fed ‘put’ when it is not clear that the battle against inflation has been won (i.e., that the Fed knows what it is doing). Because if it hasn’t, investors will eventually have to face either unacceptably high inflation and/or another reversal in Fed policy/narrative, neither of which will likely be good for equity prices.  

 

Further, I have never lived through a bear market that ended with a whimper save the 1973/74 bottom which was a protracted affair that died of exhaustion---which would be the case if indeed THE bottom is now in.

 

Patience remains a virtue.

 

 

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