You cannot be serious!

VT Tyndall Global Select Fund

You cannot be serious!

Little did Mario Draghi know that when he delivered his ‘do whatever it takes to save the Euro’ speech at Jackson Hole in 2012, the first part of the phrase would become common parlance in Central Bankers’ lexicon when trying to convince markets that they are serious on a particular course of action.

The FOMC meeting in March delivered the 25bps increase in interest rates that the market expected, however, the hawkish commentary at the meeting, and by various members since was worse than many anticipated. Jerome Powell has taken a Draghi like stance in his attempts to temper inflation, and in doing so has driven up bond yields significantly, and with it the expectations of the number of rate rises that will occur by December.

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The most hawkish stance remains that of the St. Louis Fed President, James Bullard, who caused expectations of a 50bp rise in March go from 0% likelihood to 95% back in February, before the Russia/Ukrainian conflict tempered expectations. Once more, is once again taking up interest rates.

Bullard remained defiant at the Federal Reserve meeting calling for a 50bp move and has been on the record stating that he would like rates to be boosted to above 3% to tackle inflation, the equivalent of 12 times this year in the six meetings that remain; like John McEnroe’s outburst towards the umpire at Wimbledon in 1981, the market does not believe him to be correct in his view, and ‘only’ expects between seven and eight increases by the year end, so if President Bullard’s wishes are fulfilled the bond and equity markets alike may well have a McEnroe-like tantrum.

Looking further ahead, however, despite Jerome Powell’s insistence that the Fed can increase rates without causing the economy to stall, the market still believes that the Federal Reserve runs the danger of making a serious policy mistake and that increasing rates into an already slowing economy, threatens to not only stall the economy but possibly cause the second recession in just over two years; many of the classic signs of an impending recession have started to appear, such as a pick up of M&A (back above 2008 & 1999 levels), heavy equity inflows (at $900 billion in 2021, the flow exceeded the sum of the past 19 years) and widening credit spreads, so Powell has a tight path to navigate.

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The chart below shows the market believes that, in 2023, the actions of the Federal Reserve will lead them to see the need to cut rates in order to revive the economy, which is far removed from the current dot plot published after last week’s FOMC.

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Slowing economies are not a US specific issue as demonstrated in Germany, where the ZEW survey of corporate expectations of economic growth recorded the largest ever monthly decline since the survey started thirty years ago; although the war in Ukraine has exacerbated the problems in Europe. Central bankers worldwide will be watching the moves by the Fed and the effects on both the economy and inflation.

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Where there is a modicum of consensus between the Fed and the market is that there is a real probability that the era of low rates and inflation have probably come to an end and that inflation will be structurally higher than we have experience in the past 10 years. Whether we experience stagflation (which now seems to be consensus) very much depends on whether Jerome Powell is correct in his beliefs, which given his track record in 2021, requires a significant leap of faith.

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As a final thought, despite big Mac’s various outbursts in 1981, he did succeed in finally conquering his Swedish nemesis in the final. We can only hope that markets and the economy can be equally successful in tackling the headwinds of interest rates and inflation in the coming months.

24th March 2022
Read time : 5  mins

This content is intended for professional clients only.

Data source (unless otherwise stated): Bloomberg
Not for retail distribution – this document is intended for professional clients only
Disclaimer

WARNING: All information about the VT Tyndall Global Select Fund(‘The Fund’) is available in The Fund’s prospectus and Key Investor Information Document which are available free of charge (in English) from Valu-Trac Investment Management Limited (www.valu-trac.com). Any investment in the fund should be made on the basis of the terms governing the fund and not