Spread trading against seasonality
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Let’s get ready to deal with recession
20 March 2022
I wanted to write this article immediately after the FOMC meeting on Wednesday but unfortunately, I have so many things to do that I couldn't publish it until now, two days later. The FOMC meeting... well, the markets reacted positively, Wall Street turbocharged and closed up sharply. This is despite the fact that Powell is making the American economy collapse.
I will be 52 years old in a few months, just over half of which I have spent following the financial markets. I certainly do not expect every Federal Reserve Chairman to be the next Alan Greenspan, that would be asking too much, but Jerome Powell is the most inept person I have ever seen in that role. Put there by Trump, not because of his qualities but because he is subservient and therefore easily manipulated by the tycoon.
Powell is a child of the political decay the US has had in recent years, first with Trump and now with Biden. I am not American and I do not give a damn about Democrats or Republicans, I just judge people's actions. I thought the US had hit rock bottom with Trump and instead Biden is succeeding in making his predecessor regretful. Truly embarrassing every time he speaks.
Returning to Wednesday's FOMC meeting, I admit I neither heard Powell's press conference (I have better things to do than waste my time listening to the usual nonsense) nor read the transcript and articles. I am reporting what the Federal Reserve is forecasting for 2022 (i.e., the Economic Projections) and then drawing my own thoughts. Below, you can see the document.
The Fed reduced its growth estimates for this year to 2.8% from 4.0% three months earlier. The unemployment rate remained unchanged at 3.5% while inflation was revised upwards to an optimistic 4.3%. In practice, in the nine months or so until the end of the year, US inflation is expected to fall by 3.6% since it now stands at 7.9%.
Well, of course, there is cause for optimism. It is not like there will be three rate hikes (of 25bps) in 2022 as predicted in December. There will be no less than seven projected hikes, bringing the interest rate to 2%. And if that is not enough, four more hikes are projected in 2023 and inflation returns to the 2% area.
But, excuse me, Mr Powell, was not inflation supposed to be the result of "transitory" forces that were supposed to decrease on their own? Or was it more the result of "not knowing what to do and hoping for providence?" And that was only six months ago. This brings to mind a fact, a conversation with an ex-official of the International Monetary Fund.
I published what I could divulge at the end of an article (Inflation is going to be a problem, but not the worst). One sentence he said to me resonates today like a prophecy, "what worries me is not inflation, there are other global aspects that can have major geopolitical repercussions". He did not say any more and I did not ask him for clarification.
Going back to Powell, what the Fed chairman forgets is what caused this rise in inflation. Certainly, with the war in Ukraine, we have seen a sharp rise in oil (and therefore gasoline), gas and several other commodities (such as wheat). However, it is the pandemic that has pushed up inflation with the sharp drop in demand and unprecedented inflows of liquidity through supportive monetary policy measures. The outbreak of the conflict between Ukraine and Russia has only increased a problem that was already present and poorly managed.
Since the outbreak of the pandemic, the prices of raw materials, in particular those used for food production, have risen sharply, driven also by rapidly growing demand. Now, then, with the war and restrictions, food prices will continue to rise, pushing inflation even higher.
This situation is likely to get worse as the days go by. Ukraine has banned the export of all food. Other countries have begun to do the same, such as Hungary, which has banned the export of cereals from its territory to any destination, and Moldova, which has blocked the export of wheat, corn and sugar. Bulgaria, Turkey and Argentina are also taking action. There is a risk that further geopolitical tensions will arise and lead to further price increases.
I conclude with my comments, I have dwelt enough. The interest rate increases decided by the FED will only lead to an even greater decrease in the growth of the American economy. High inflation is mainly due to rising food costs and cannot be combated by raising rates.
This increases the cost of money, not the supply. The demand for food will not decrease (people will continue to eat) either with an interest rate of 0.25% or 2%. This objectionable monetary policy will only lead to a slowdown in investment because of the sharp rise in the cost of money.
Once again Powell has made the wrong decision (but he can always repent).
In this article, I report what the Federal Reserve is forecasting for 2022 (i.e., the Economic Projections) and then draw my thoughts on Powell’s monetary policy
I am a macroeconomic and financial analyst with over 30 years’ experience, including two years as a fund manager. I specialise in currencies and commodities, and I am the author of several successful books on trading, macroeconomics, and financial markets.
2 Comments
I’ve not used your site for the analyses…I followed you after reading your book and learning so much about fundamental analysis, incorporating it into further studies. Unfortunately, many people just want to be told what to do, rather than doing the work to find out why, and then making their own decisions. Thanks for all you do, and all you’ve done.
Hi Elizabeth,
first of all, thank you for buying my book. Then, if you need anything, you know where to write to me 🙂
Have a nice day!
David