Douglas Rissing
Greg Bonnell
My next guest says the recent volatility in both the bond and equity markets suggests perhaps investors have been trying to fight the Fed. And they’re losing. And that’s leading to some volatility out there. Brad Simpson, Chief Wealth Strategist at TD Wealth. Brad, great to have you back on the program.
Brad Simpson
Great to be here. Thanks.
Greg Bonnell
All right. So, let’s talk about this whole thing about fighting the Fed. Because we had that summer rally. And I think a lot of people are trying to wrap their head around it. Saying, wait a minute. The Fed’s telling us one thing. Why is the market doing this?
Brad Simpson
Yeah. I actually think it’s one of the most remarkable things I’ve ever watched in the market. And if we look, we’ve seen some pretty remarkable things over the years. But that is the one thing that we could really count on is this adage really does ring true. And if you step back for a minute and you look at what’s happening into July, and into early August, is we had interest rates, 10-year treasuries, were starting to work their way down. Equity markets start to climb their way back up. And then if you look at the financial conditions index, both the stock and the bond, we saw conditions loosening. And if you’re a central banker, I mean, here’s the three things that you didn’t want to see. You didn’t want to see rates coming down. You didn’t want to see markets going up. And you sure didn’t want to see through the traditional and the shadow banking system that money was easing up in there. And I think a lot of that has to do with that a fool kind of believes what they want to believe. And we’ve got so used to and so addicted to the Central Bank coming to the rescue, that now it’s at the point like we just can’t believe it will happen. Like just do they really mean it? And I think what we’re seeing right now is that– we were writing and talking about this all summer. And going, this is an aberration. Like trust me. This isn’t going to continue. And now we’re halfway through August on, I think the light bulb started to really come on. So, and I think that people are waking up again that very clearly there isn’t a pivot coming any time soon.
Greg Bonnell
Was the light bulb event Jackson Hole? It just seemed like a very– I think it clocked in maybe seven or eight minutes. But it was very stern. Right. Not that I expect a central banker to be a laughing man. He sort of came out and just said this, this, this. And then walked off.
Brad Simpson
Yeah. I think that’s– and then even if you look what’s happened in the following days. And if you even go before Jackson Hole, if you read the newspapers, and read commentary, and all that, it’s going to be Jackson Hole. It’ll be quiet. And this might be one of the least significant Jackson Holes we’ve had in a long time. And I actually think there’s a coordinated campaign by central bankers right now. Powell came to that. Was just unbelievably clear in the days that have following you have seen Fed bank governor after Fed bank governor have come out and said basically the exact same thing. That inflation’s bad. That there’s no pivot coming. And we’re going to keep fighting this thing. And then of course, you sell the ECB to 75 basis points today. Said exactly I mean, exactly word for word almost what I said. Bank of Canada that the day before. And so yeah. I think what is going to be interesting to see is I’m not so sure everybody will keep on this. Oh, OK. They meant it for a while. If you don’t need a sign that we are in a regime change, we aren’t in a regime change. Period. And we have to start thinking about it in that way.
Greg Bonnell
As you said, we are so accustomed to the Central Banks riding to the rescue. There was even a time there where investors could throw a bit of a tantrum. And the Central Bank would say, well, we heard you. We’re going to back off. That’s not going to happen this time around. If they’re adamant. If they’re going to stay the course. What does it look like, this environment, for investors? And for how long we’re going to be under this sort of regime of saying we need to inflict pain. We know it’s going to be painful. But it’s just what we have to do.
Brad Simpson
I think that the long story short is that I think the first view was when we were going when things started opening up again that this would take a couple of quarters, and we’ll work our way out with this. I think today it kind of really it works into two camps. And I think maybe the best way to oscillate between those two camps is that a consensus view is that we’ll work this out in the next three or four quarters. We will somehow miraculously have a mild recession. Thread this eye of the needle. And then so if that were the case, then kind of where equity markets and fixed income markets are now are probably in a fairly reasonable place if all that rings true. The other side, the other camp, would suggest that this is going to be a lot longer and harder than what was originally thought. And I think that a kind of a key here I think for investors is– it probably be a key theme we’re going to come back to a bunch of times here today. Is that I think we need– and the answer to where we are is that this is going to be a process to get this back to where we need to get it to. And that is what happens a lot in markets when there’s lots of liquidity, and lots of movement, and lots of momentum, what makes that market move is an awful lot of speculators and a lot of quantitative traders making things move. This is a world that you want to be an investor today. And so that changes your dynamic. This is a really tough trading market to be in. And so I think more and more is that if you want to determine which economic environment we’re in, I can pull up a chart for you that’ll make an argument whatever way you want it to be.
Greg Bonnell
Make the numbers dance however you want them to dance.
Brad Simpson
Because there’s so much incredibly conflicting data that is out there. And that conflicting data, it’s always really, really hard to frame where we are in the present. This one is particularly difficult because there really is all this pick your data set you want, and you can kind of build a story around it.
Greg Bonnell
So, we’re in a situation right now where the central bankers are basically saying, take the tough medicine. We know it tastes bad. And we don’t like it, but it’s going to provide the cure. So, in the end, are we confident that the central banks will get a handle on inflation? That they will bring it down?
Brad Simpson
Yeah. Yeah. Yeah. And I think there’s a couple of reasons why. I mean, I’m still in the camp that we sometimes have this tendency to make things so big that– if you go back, and you look over the last year and a half, and just look at money supply– look at M2. I mean, it absolutely J curves to the moon. And then somehow, oh, how did inflation happen? Well, I think that was pretty clear. And then once you looked at that and said you give folks a lot of extra spending money, and really low interest rates, and a lot of time on their hands, you’re going to get a pretty active economy. And that’s indeed what we saw. And so, this stage you have to look at is that there are a lot of instances that you can look at. You see manufacturing is starting to slow. The cost of food. I know we’re still, and know we talked a little bit this last time, but it is starting to flow through. And you’re seeing when– it’s still a little bit of surprise when you’re at the grocery store. But it’s not as big a surprise it was because the baseline costs of food costs are coming down. When you drive past a gas station and look up, the price of gas has come down. And so we’re at this number at 10. And what we’ve been saying is that this move from 10 to 5, that’s what we’re in the middle of. And all things being equal, this is happening. And we’re in the middle of it. And in short order, we should get there. This move then, from five down to into the two and three, this is where the sticky stuff is going to be that we’re going to have to work through. And I think the key determinant really if we want to watch on that is kind of twofold. Which is the housing on one side. Labor market on the other side. And those two things are going to tell you at what rate we’re going to get this down to that two or three. And probably the likelihood is this is a story of your fourth quarter ’23 moving into ’24 is really when you’re most likely where a lot of this will get itself worked out. So, it is a ways away still.
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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