IMPORTANT: shift in monetary policy narrative 220620

This is IMPORTANT…but I’m being redundant because everything I blog about is important, otherwise I wouldn’t blog about it.

The Federal Reserve is starting to walk back its tough talk on fighting inflation with higher interest rates.  As I’ve previously mentioned, tightening monetary policy won’t pump any Oil, nor grow any Wheat.  The recent dramatic price increases in Energy & Food are a direct result of the Ukraine invasion and have little to do with Pandemic monetary policy excess.

I continue to believe that we’re in a post-Pandemic transition, not inflation.  Prices for many assets have long ago peaked, and even Energy & Food prices are mitigating:

Asset                  Peak Date                        Decline

20 Yr Trsy TLT    3/9/2020                         -37.62%

Lumber               5/3/2021                         -65.26%

Steel                   5/5/2021                         -25.17%

Bitcoin                11/9/2021                       -69.76%

Coffee                 2/9/2022                         -12.02%

Copper                3/6/2022                         -19.76%

Oil                       3/6/2022                         -16.09%

Gold                    3/6/2022                         -11.20%

Wheat                5/17/2022                       -10.84%

Prior to the Ukraine invasion, Gold, Copper and Oil had all peaked, 8/2020, 5/2021 & 10/2021, respectively.

Until last week, the FED has been curiously complacent in promulgating the Media narrative that post-Pandemic inflation is rampant, FED policy is to blame, and tighter monetary policy will fix it.   Chairman Jay Powell has started to walk back that narrative.  In terms of what’s driving inflation and whether monetary policy can remedy it, he recently stated, “I think that what’s becoming more clear is that many factors that we don’t control are going to play a very significant role in deciding whether that’s possible or not.”

I interpret his statement to reinforce what I’ve previously believed- monetary policy will tighten only enough to get back to pre-Pandemic norms.  Meaning that the economy will slow down from Pandemic era induced excessive 6% GDP growth; but monetary policy won’t be so restrictive as to cripple the healthy part of the economy.   

Watch for the “narrative” to start highlighting healthy parts of the economy and stock market.  Valuations are extremely favorable, in the case of Small Caps, by some estimates they’re at the best levels in over 20 years. 

Now that the Media has scared everyone into capitulation, expect to start seeing more headlines like the one that appeared yesterday in Barron’s:  “Small-Cap Stocks Have Gotten Crushed. Watch for Them to Rebound Soon.”

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