FNArena’s Weekly Insights – May 23 2022

In this week’s Weekly Insights:

-Don’t Fight The Fed
-Beware The Bear!
-The Quote
-Conviction Calls
-Rudi Talks
-Recent Weekly Insights To (Re)Read

By Rudi Filapek-Vandyck, Editor FNArena

Don’t Fight The Fed

One of the defining events for global finance in 2022 happened during the Wall Street Journal Future of Everything Festival where Fed Chair Jerome Powell spoke on May 17 and -finally!- got the message out the world’s most powerful central bank is now singularly focused on bringing inflation down towards 2% (from 8%-plus).

His admission this would not be possible without causing some pain, including the unemployment rate rising, would have rattled a few, but that was the explicit intention.

For many years investors have relied on the Federal Reserve to bail them out when markets showed their vulnerability and proved at risk of breaking down. With the 2020 experience still fresh in mind, many an investor the world around has become used to the fact that buying-the-dip is a simple but highly effective strategy.

Now the Fed is no longer aiming to prop up the economy through rising financial assets, and thus attitudes towards risk-taking and spending need to change. Across the USA, but preferably including the rest of the world too.

While inflation is stuck in between ongoing covid restrictions and supply-side disruptions and challenges, with the Russia-Ukraine war adding its own twist, the only way to tame inflation is thus by reducing demand. And in order to reduce demand, consumers need to become less comfortable with their financial situation and prospects.

Central banks have no control over global supply chains, but they wield enormous leverage over credit and financial assets. Bringing down asset values, and thus make consumers feel a lot less comfortable, seems but the most logical policy aim to pursue in 2022.

The exposure of US households to US equities has never been greater. Plus add a whole new generation of young “investors” who don’t genuinely know the practical implication of ‘risk’ and believe, with conviction, that owning crypto-currencies and NFTs is the quickest route to becoming a billlionaire before celebrating their 30th anniversary.

In Australia, a similar observation can be made about a general perception that housing prices never fall, mate.

Click to read the Full Report