The fed won. I admit defeat. My point is that what just transpired was merely the most recent bout. Circumstances were extenuating. I demand a rematch. As soon as things begin to normalize, I absolutely believe I will win. To provide a bit of context for how I feel now, here’s a groovy little two-minute ditty from the Bobby Fuller Four to help channel the vibe…
One of the oldest adages in finance is “Don’t fight the fed”. In Canada, that translates into “Don’t fight the Bank of Canada”. That, in a nutshell is what I did. I brought a knife to a gun fight and I lost. Here’s why I lost that fight… and why I absolutely expect to win the next one:
I took the position that markets (and especially the U.S. market) were expensive in early 2020. Sure enough, markets tumbled a month or two later – not because of fundamentals or valuations, but because of a global pandemic that no one saw coming. For five weeks starting in February, it looked very much like I had been vindicated. I suppose I could have taken credit for being prescient, but in fact, I was merely at the right place and the right time. By mid-March 2020, I was feeling pretty good about my call.
Then it happened. Central banks mercifully came riding to the rescue. It was the right thing to do when viewed through many lenses, including public health, economic stability, and small business viability. They did so with such fury and determination that no one had ever seen anything like it before. Interest rates were slashed to effectively zero. Governments of all political stripes around the western world took advantage of their newfound monetary cover and started sending cheques to what seemed like anyone who could fog a mirror. Before the end of March, markets hit a bottom and began an upward march. A massive bull market was unleashed.
I don’t honestly think anyone could have foreseen what ensued. There was certainly no precedent for markets dropping violently and then recovering equally quickly. To have expected that outcome would be to have expected something that had no antecedent in all of history anywhere on earth.
For nearly 23 months now, interest rates have remained at effectively zero. Pretty much everyone expects that to change in March. If lowering rates is like giving Popeye can of spinach, raising them is like giving Superman a bag full of kryptonite. Forgive many the pop culture references in this post, but I find it helps to make things accessible and vivid. Basically, the artificial party that has gone on for nearly two years and has given almost everyone a false sense of confidence is going to end. Soon. Badly. I’ll eat my hat if I’m wrong.
Here’s a longer song from the legendary Steve Winwood to explain how I expect to feel once the rate hikes kick in – not because I want to see markets and economies crash, but because I expect to be vindicated. If markets were pricy in 2020, they are ridiculous in 2022. The risk was large then. It is much, much larger now.
I’ll leave you with one final adage. Some people like to say: “live by the sword; die by the sword”. If you believe that macabre turn of a phrase is apt, consider the 40-year macro trend we have been living through. Interest rates have been dropping throughout the west for that long. In so doing, they have been propping up the economy and sustaining economic growth even as it slows despite the lower rates. We’ve been depleting our stimulus capital for nearly two generations and there is precious little left. Normalization will bring pain because it is not normal to not feel pain. Markets and economies cannot grow to the sky. I therefore propose an economics twist on the old phrase: “live by rate cuts; die by rate hikes”. The rematch is coming. I expect to win.