What became clear in the data last week is that central planners have been unable to tame the inflation they unleashed. Ironically, the same week former Fed Chairman Ben Bernanke was given the Nobel Prize in economics.
The irony is that Bernanke created the wide array of new powers for the Fed which have been used to manipulate interest rates, bringing them down to multi-century lows, which created an enormous bubble in financial markets.
When asked on 60 Minutes whether the Fed would be able to withdraw that money so as to avoid inflation, Bernanke claimed it would. When asked how confident of that he was, he answered “100%.” That is what the great Austrian economist, Hayek called “the fatal conceit,” the excess intellectual pride which causes central planners to think that they know more than the rest of us combined, and therefore should have the privilege of overriding the financial decisions of billions of people through government decree.
Last week’s reports showed stubbornly, persistently, and broadly high inflation rates, and markets decided that the Fed had no choice but to continue to burst the bubble it had created, despite a worsening economy and the growing threat of a credit crunch. Markets are simply people with skin in the game, as opposed to bureaucrats like Mr. Bernanke, who helped trigger one of the deepest recessions in American history, was slow to react to it, eventually overreacted, and helped create the next crisis. This string of failures is not punished, but rather rewarded with the highest honor the international community offers in the field of economics. Investors, on the other hand, know better.
Big Picture: Last week was almost entirely about the various inflation reports. Wholesale goods price inflation and retail goods price inflation were both higher than expected. Furthermore, the minutes of the prior Fed meeting were released and they generally indicated that the members were committed to hanging tough on fighting inflation – though there were enough doubts expressed to cause markets a bit of confusion about whether the minutes really were fully “hawkish” (inflation fighting). Eventually markets settled on hawk, which triggered a number of standard market reactions to that scenario:
- Fed rate futures rose for every meeting through the beginning of 2024.
- Current interest rates rose, especially the shorter duration rates, which are typically most sensitive to Fed tightening.
- The dollar rose as international investors moved money to the dollar as a currency which offers higher yields, but without the higher risk seen around most of the rest of the world.
- The dollar price of gold dropped, indicating increasing dollar strength.
- Crypto currencies sold off.
- Dollar-denominated markets outperformed global markets.
- Emerging markets and emerging market currencies sold off.
- Riskier bonds sold off more than lower risk bonds.
- The types of stocks that depend on low interest rates generally underperformed the types that are less interest rate sensitive.
Some trades did not conform with the standard pattern when interest rates are expected to rise:
- Some categories of US Equities rose.
- Some growth-dependent sectors overperformed recession-hedging sectors.
- The inflation expectations which are implied by TIPS (inflation protected treasury bonds) went up.
- Real Estate Funds were generally positive.
These comparative returns between asset classes such as stocks, bonds, currencies and commodities are consistent with the following account: The Fed has slowed inflation but is far from beating it. The Fed will continues to tighten, but will not bring inflation down to normal for some time. The US economy is likely to slow, but not a hard crash. The global economy is likely to have a harder time than the US. Tight money will likely cause a credit crunch, driving up default rates for risky bonds.
This coming week the big items will be about the housing markets: housing market index, housing starts, existing home sales. Of…
Read More: Bernanke wins Nobel Prize; investors suffer crisis he created