September 2022
September 2022 is looking awfully problematic. The bear market rally has recently ended with Jerome Powell’s Jackson Hole speech declaring they’re absolutely serious and there is more pain to come. We’ve all been trained by history not to believe what central bankers say – so this latest short and very clear statement of intent caused some consternation to the market. Are they really serious? What, no early Powell pivot?
Sadly, for the bulls, the FED and perhaps even the ECB is more likely than not to back up their tough talk and raise interest rates by 75bps this month. Even the RBA is more likely than not to increase rates by 50 bps. Furthermore, and just as importantly but neglected by the market, quantitative tightening will begin in earnest, causing much more pain to overpriced asset prices globally – including even the perennial Australian favourite of Aussie housing.
Many equity and property investors are optimistic, but eventually, if you read the riot act to them and follow through with concrete actions, they get the message. In September 2022, I believe they’ll get the message. We will still have “too high” inflation even if its coming down, monetary policy tightening (including both interest rate increases and contracting balance sheets) and slowing unproductive economies and financial markets that aren’t capable of handling any of this well. Geopolitics is a mess; it looks as if the key powers are happy to create and escalate conflicts, destroying peaceful prosperity and energy and food markets while causing chaos and dysfunction. Markets don’t exist in a vacuum.
Historically the FED raises rates until something breaks. This time isn’t looking any different as they fight to get inflation down to 2% sustainably in a world in which they no longer control inflation and in which many beneficial societal conventions are under threat. Meanwhile governments and fiscal authorities – who are in no small part responsible for stagflation – are actively working against the inflation battle with ridiculous “inflation busting” packages and stimulus which rather than fight inflation actually contribute further to it. Central banks have made it clear that they’ll accept that market falls and some unemployment is an acceptable and necessary result of their intent to fight inflation.
Something meaningful will likely break and break soon and falling markets are an entirely reasonable expectation. Don’t be surprised if in September, the chickens come home to roost in markets. The US equity market is at significant risk of retesting if not even breaking its lows of June, not at some distant time but very soon.
Forecasting has been difficult this year, so taking an extreme view is risky, but so too is depending upon ill-suited approaches such as thinking markets always go up in the circumstances like this. 2022 is the year in which bonds, equity and property markets all broke together… Without recognition of the current economic and geopolitical challenges and an active alternative approach better suited to a recognition of the world as it is, you potentially have a wealth destruction strategy with little near-term hope of blunting the pain.
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