A Contrarian View on the Economy and the Fed
Author: Greg Valliere
March 22, 2019
WE LOVE CLIENT EMAILS, what a bright and provocative group of readers . . . We were particularly taken by an email yesterday from one of America’s leading economists, who has a very different take on this week’s Fed decision. We summarize his thoughts — anonymously — below.
THE ECONOMY IS POISED TO REBOUND, amped up on Fed stimulus, the economist writes, because the Fed “caved” to Donald Trump, which “will be remembered as similar to the relationship between Chairman Arthur Burns and President Nixon; the latter leaned on the Fed, which responded with dovish policies in the early 1970s. “The Powell ‘put’ is even stronger than Janet Yellen’s,” this economist asserted, “which is what you get when you appoint a lawyer to head the Fed.”
IT TOOK THE STOCK MARKET A DAY to recover from its “what does the Fed know that we don’t know” initial reaction, but by yesterday it was clear that stocks (except, perhaps, for financials) should benefit as the economy re-accelerates this spring, our friend writes.
S&P FORECAST: “When consumer spending and housing and real GDP accelerate in the second quarter it will be ‘risk on’ big time,” he said, adding that the S&P could hit 3,000 this spring even without help from financials. The index presently is at 2855; our friend wrote yesterday morning, before the latest rally.
WHAT ABOUT INFLATION? It could become a risk, this economist said. “Gasoline prices are headed to at least $3 per gallon by Memorial Day, so headline CPI and the personal consumption expenditure deflator (the Fed’s favorite gauge) will get a big boost in coming months, which the central bankers should like. The Fed wants the PCE indicator to surge above 2% by the fourth quarter, the economist said, “although they will not forecast that.”
WEDNESDAY’S EXTRAORDINARY FED ACTION “guarantees no recession in 2019 or 2020,” despite a flatter yield curve, the economist said. “Indeed, if the curve inverts, the FOMC will cut the funds rate once or twice and will pump up the economy and inflation by weakening the dollar (as we pointed out yesterday) and boosting interest rate-sensitive spending and raising stock and commodity prices.”
THIS ECONOMIST THINKS 2019 AND 2020 “will be a good time to be bullish on hard and financial assets,” because “the Fed caved, and I think Donald Trump had as much to do with it directly as indirectly.” And, right on cue, Trump blasted Chairman Jay Powell yesterday for his 2018 rate hikes, which the president said curbed GDP growth. If our economist friend is correct, Jay Powell won’t be making that mistake again.
The views expressed in this blog are provided as a general source of information based on information available as of the date of publication and should not be considered as personal investment advice or an offer or solicitation to buy and/or sell securities. Speculation or stated believes about future events, such as market or economic conditions, company or security performance, or other projections represent the beliefs of the author and do not necessarily represent the view of AGF, its subsidiaries or any of its affiliated companies, funds or investment strategies. Every effort has been made to ensure accuracy in these commentaries at the time of publication; however, accuracy cannot be guaranteed. Market conditions may change and AGF accepts no responsibility for individual investment decisions arising from the use of or reliance on the information contained herein. Any financial projections are based on the opinions of the author and should not be considered as a forecast. The forward looking statements and opinions may be affected by changing economic circumstances and are subject to a number of uncertainties that may cause actual results to differ materially from those contemplated in the forward looking statements. The information contained in this commentary is designed to provide you with general information related to the political and economic environment in the United States. It is not intended to be comprehensive investment advice applicable to the circumstances of the individual.
AGF Investments is a group of wholly owned subsidiaries of AGF Management Limited, a Canadian reporting issuer. The subsidiaries included in AGF Investments are AGF Investments Inc. (AGFI), Highstreet Asset Management Inc. (Highstreet), AGF Investments America Inc. (AGFA), AGF Asset Management (Asia) Limited (AGF AM Asia) and AGF International Advisors Company Limited (AGFIA). AGFA is a registered advisor in the U.S. AGFI and Highstreet are registered as portfolio managers across Canadian securities commissions. AGFIA is regulated by the Central Bank of Ireland and registered with the Australian Securities & Investments Commission. AGF AM Asia is registered as a portfolio manager in Singapore. The subsidiaries that form AGF Investments manage a variety of mandates comprised of equity, fixed income and balanced assets.
About AGF Management Limited
Founded in 1957, AGF Management Limited (AGF) is an independent and globally diverse asset management firm. AGF brings a disciplined approach to delivering excellence in investment management through its fundamental, quantitative, alternative and high-net-worth businesses focused on providing an exceptional client experience. AGF’s suite of investment solutions extends globally to a wide range of clients, from financial advisors and individual investors to institutional investors including pension plans, corporate plans, sovereign wealth funds and endowments and foundations.
For further information, please visit AGF.com.
© 2020 AGF Management Limited. All rights reserved.