Markets are being whipsawed by rate hike threats from Central Banks, China lockdowns, the Ukraine war, while being stalked by inflation and stagflation. The big risk remains policy mistakes – trying to solve these with the wrong monetary and fiscal policies.
Occasionally the Morning Porridge strikes a lucky insight on markets – this morning here are some thoughts on how 2022 markets and events may or may not develop. If they occur I shall hail myself an investment genius. If not, can we quietly forget them?
Market expectations are all over the place as participants factor in what a new Fed appointment might mean in terms of lower for longer rates and more accommodative policy – but it all feels increasingly hollow. Momentum is not infinite!
The Fed finally begun its cautious taper and the market did not immediately self-destruct… but the consequences of 14 years of central bank experimentation, regulatory overkill and the “processification’ of markets will have consequences… they may be bleak…
The biggest risk to markets have always been policy mistakes by central banks and/or governments. The risks are rising as confusions about inflation abound. The reality is Central banks have tripped themselves – by assuring us inflation was transitory, they’ve pretty much nailed on its permanence!
There are many very clever investment firms – Baillie Gifford takes a long view to recognise and consider the future and trends, while Bridgewater is taking a view on inflation and rates. But, what if the most important factor likely to drive long-term returns proves to be the destabilising consequences of the last 10-years of interest rate repression and the distortion of rules, regulations and fads? These could prove the “no-see-ems” that tumble markets!
Fed Head Jerome Powell set the market wagging y’day, triggering a mini-taper tantrum in bonds and stocks when he revealed no immediate rate hike but the possibility/likelihood of 2 rate rises in 2023. Bonds and Stocks fell. Bonds are unlikely to get much better in coming months – unless we see a market wobble that forces Central Banks to intervene, or something that creates a flash flight to quality. We are now in new market phase – the correlation between bonds and equities is looking vulnerable to a reversal when the free money that’s fed the rally since 2010 dries up! This is getting….. “interesting”.