June 24, 2022

Content But Not Convinced

 In the world of investment nothing offers more false security than a crisp summar

The Markets

The markets have been in decline this year, there is no quick answer for it, capital markets predict the future, but it’s also not as complicated as it sounds. That’s because the future is to the capital markets an uncertainty, otherwise referred to as risk. But the uncertainty becomes denser when additional challenges enter the markets. For example, inflation has been a growing problem since last summer beginning with supply chain disruptions, then we were introduced to 20th century war in the 21st century, then the world learned of the numerous products that are imported from China found a different supply chain disruption as the Chinese government locked down urban areas in the face of a variant of Covid that was failing to hinder the massive surge in international travel taking place in the West. Crisp enough? 

The Fed

It widely understood in the investment community that the Federal Reserve Board is nearly unanimous on being more aggressive in raising interest rates at their monthly meeting to vote. The troublesome area for now is the narrative that follows the vote. This week Fed Chairman Powell addressed the Congress to answer questions regarding inflation and the Fed’s strategy to bring it down. The trouble is one side of aisle is blaming the Russians, and the other side is blaming the current administration’s policies. Little time was spent discussing the post pandemic adventure as a source, given the sharp increase in GDP, sharp drop in unemployment and the numerous regulations that impede the energy industry, further exacerbated by the war in Ukraine and becoming a global problem. On top of that the working public that saw an increase nationally in wage growth over 5.5% over the last twelve months. This is important, in my opinion since the consumer makes up nearly 60% of GDP. And while Manufacturing picked up from its level of 12%, the growth was offset by the decline in Exports coming at the expense the Fed, whose activities to raise interest rates is favorable to the global value of the Dollar, which is deflationary. The Fed has more work to do, not just to battle inflation, but to convince the investing public that they are on top of the problem.

External Events

Uncertainties usually follow the global political and pop culture environment, which these days is nearly indistinguishable. The divisions in Washington are as unstable as ever as is the broad popular culture. The big change is the unintended consequence of the divisions, and that’s the dwindling interest in globalization. The focus of the current narratives, away from the pandemic conspiracies that captured the imaginations of millions of people the world over is, in my opinion, good news. First, because just as the current administration is committed to bringing Semiconductor production domestically, there is increasing agreement regarding the repatriation of other points of production areas of Capital Goods, Consumer Products, Industrial Supplies, the list goes on with nearly 20% coming from China alone. This could go a long way in softening any recessionary slowdown.

In the meantime, last week ended very oversold. However, unless the three major challenges to the Capital Markets are reasonably addressed, Inflation, War and China, the markets definitely have room to correct, but, in my opinion, less so to become a genuine Bull Market.

No comments: