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By any stretch of anyone’s imagination, this has been a miserable year for both stocks and bonds. Many portfolios have just taken it on the nose, as “plays for appreciation” became “plays of depreciation.” Virtually all of this has been caused by the Fed charging ahead in their battle against inflation, while almost totally ignoring the collateral damage of higher interest rates, and market volatility.
The Fed may prefer one measure of inflation, but for me, the most accurate indication is the average of the Producer Price Index (PPI) and the Consumer Price Index (CPI). This number is 7.00% now.
Here is the line in the sand, in my view, where you are either beating inflation or losing out to it. The Bloomberg Equity Indexes tell the overall story with the DJIA being down -5.25%, the S&P 500 down -14.57%, and the NASDAQ down -26.74 for 2022. Nothing on the positive side or even close to our inflation numbers. Virtually all portfolios of almost any strategy have been whacked!
No matter what investing strategy that you use, the liquidating values are not showing any joy. Since virtually all of our market pain is caused by the Fed and their rush towards a 2.00% inflation number, I wouldn’t be expecting some kind of “pivot” anytime soon. The best that can be hoped for, in my opinion, is some sort of slowdown, but I do not see any stop sign ahead. We are all trapped in the Fed’s headlights.
The bond markets have done no better with the Bloomberg Treasury Index down -10.95% for the year and all of the secondary fixed income markets trailing in their dust. We are just getting pummeled, and I do not believe there will be any major changes anytime soon. Yet, all of this is only part of the equation.
Since the days of the financial crisis of 2008-2010, we have had an “easy money” environment. There was never any “free money,” but the low interest rates certainly helped many corporations and individuals. That is now all gone. Puff! Up in smoke!
The continuing barrage of higher rates is having, and will continue to have, very negative implications for both corporate revenues and profits. Make no mistake about this. Look right and then look left, and you will see what is happening as ratings downgrades flourish and bankruptcies become more prevalent.
Any kind of borrowing is becoming more treacherous, whether it is mortgages, real estate loans, individual bank loans, or the borrowing of money by anyone for anything at all. Moreover, many banks have virtually shut down their lending until the sky begins to clear, which I hope will be sometime next year. So money itself, at whatever rate, has become much more difficult to obtain.
The Fed is also not doing any favors for the government. The cost of their borrowing is up significantly as well. In fact, you know things are messed up when the 1-year Treasury Bill has the highest rate on the yield curve. The yield on the 1-year Bill is currently 114 basis points higher than the 10-year Treasury and 108 basis points higher than our 30-year Treasury. The mess is just plain to see, in my viewpoint.
It is no wonder then that the markets, and the economy itself, are floundering. We can all argue about whether we are in a recession or not, but it is tough to make any serious argument that we are not in some sort of economic downturn which is affecting everything – and I mean everything. Some have said that “Cash is King,” but the return on cash even now is nowhere close to our average inflation rate. It may make you feel better, but you are still on the red ink side of the inflation line.
It is odd. The Fed continues to speak but the markets don’t seem to be listening. It is either that or “wishful thinking” is clouding many people’s heads. I am telling you again, there will be no real “pivot” anytime soon. Chairman Powell has just one objective, and he will not stop until it is attained.
Get it through your heads, we are miles away from any 2.00% inflation rate. What the Fed should do, in my opinion, is readjust to a 4-5% inflation rate goal and just stop and let things simmer down. However, I am not holding my breath on this, and I wouldn’t advise you to hold your breath either.
We are caught in the crosshairs.
Take cover!
Original Source: Author
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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