Fed Letting Inflation Run, Good For Stocks, Gold, Bitcoin. Bad For Bonds
Updated: Feb 24
The following was posted to subscribers on February 21, 2023.
I'm still bullish.
It's not so much the high CPI number that I'm focused on but rather it's the Fed's reaction to that number which they said was, 'baked into our expectations.' The Fed's sticking to 25bp increment hikes is very very fine even with high inflation.
Markets worry more if will the Fed kill the economy. I'd argue that over time the market does not worry about inflation in isolation. If inflation is high and the Fed will not kill the economy, buckle up because this train can go higher.
The Fed is starting to get (correctly so) chicken that their big hike moves should have a lag effect on the economy and they are admitting that the housing data of real-time housing prices dropping is lagged in the data. Jeremy Siegel says if housing data was reported real time in CPI the last few core-CPI reports would have been negative! The Fed is starting to pay attention to Siegel (a side note; everybody should always pay attention to any Siegel).
The Fed is now aware of all that and going slowly.
A going slow Fed is very good for the economy and stocks.
Real GDP (ex-inflation) is currently tracking about 2.5%. Inflation is tracking about 6%. So nominal growth is tracking 8.5% (round trader numbers).
The Fed at about 5% is likely not enough to slowdown 8.5%.
5% is far from 'restrictive' and moving up at 25bp hikes is opening the door that both GDP and inflation can move higher. I've told subscribers 25p hikes is like flies on the highway windshield with an economy at 8.5%.
That is very good for the market. Yes, good, not bad.
Since the market is of course prices, inflation is good for prices, and yes, market prices.
Things always change but as long as economic metrics are staying firm and the Fed is not doing more than 25s, I think this current market window is very very bullish medium term.
The report said to get inflation to 2% near term, a recession would be needed and concluded it's worth it to have patience rather than force a recession.
This is an important and interesting nuance that's developing I think globally since all central banks copy each other (which is pretty scary) but it means that central banks maybe are going to allow above-goal inflation! They may not admit it but that's what may be unfolding.
If so, that is stock market bullish.
The Fed's not going to kill the economy to cause a recession which is what all the bears were worried about. And just the opposite, the Fed's getting a good economy and letting it run. That's opposite what the bears are worried about. And there's still many bears out there that have to unwind shorts. That unwind should give support to markets.
I really think this will be a surprise to the bear's inflation story!
This is also confirmation for our thinking that the Fed is, yes allowing inflation to run. The Fed is now likely NOT going to kill the economy. This is so good.
Letting inflation run is probably pretty bad medium term for Bonds and TLT but good for stocks, gold and Bitcoin (BTC, BITO).
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