Fed: What to watch out for from the Fed and how to avoid India’s equivalent of meme actions
The big event the markets are watching for is, of course, the Jackson Hole Symposium. How much importance should we really place on this particular event at home as well?
This is a very big event for world markets. It lays out long-term policy direction from the Fed and 45 other central bankers are participating in it, so we’ll get a lot of information, a lot of news flow. The markets are at a standstill waiting for what will come out. You won’t get any tactical moves. You won’t get an idea of what will happen in September at the Fed meeting, it will be more of a policy-setting talk.
The 2018 speech really laid a lot of groundwork and 2019 then kicked things off. 2020 was very critical in that the first time the Fed said that instead of targeting 2% we would take an average of 2% and if you see a lot of problems in the United States in terms of induced inflation by the money supply, this part comes from this change in the mandate of the Fed.
We’ll see what Powell is talking about. Other Fed Chairs and Governors set the tone just after July when the market rose thinking it was a Fed pivot. The Fed is talking about milder rate hikes and rate cuts in the middle of next year. All Fed Governors worked overtime to disabuse the market of this conclusion. They say we need a higher rate for longer and that inflation is way off the 2% target. I think those will be some of the key works.
One number that I would look at and maybe dwell on is the Fed studies of unemployment rates versus inflation and what comes out of that; why does it matter the fed has forecast an unemployment rate of 3.9% for next year and 4.1% for the following year when its own studies show that an unemployment rate of 5% is needed to control inflation. I think the Fed has been behind the curve. They’ve lost a lot of credibility and Powell will try to address the criticism. The market has more or less discounted all of this so that it is not seen as warmongering.
“ Back to recommendation stories
This year, rice or paddy cultivation has been below normal.
Yes, about 13% less area was sown due to monsoon deficiency in some key rice growing areas. Overall, if you look at the type of drought situations that we see around the world, we expect agricultural commodities to rise very strongly. This year is shaping up to be a very constrained year, from cotton to commodities. We see a lot of challenges for agricultural products in terms of production. Large swaths of the United States, Europe, China and Southeast Asia are facing very severe droughts. We will see trouble ahead and the government acted early.
What do you think of some of these metal names and how do you see the whole metal space cycle?
The big problem is the foundries that are closing, the factories that are closing around the world due to a lack of electricity or too high energy costs, as we see in Europe. We have seen some of the remaining US steelmakers increase their prices sharply, given the magnitude of energy costs. This is one of the positive aspects on the supply side. But we have export rights on certain metals and this is becoming a constraint.
The second big part is the Chinese revival; the 19-point program they unveiled on Wednesday looked like a wet firecracker of around $136 billion at first, but if you add all the factors mentioned in the 19-point and previous stimulus, it becomes a pretty big package of infrastructure.
Now the key will be how much will be rolled out this year, how much is just cosmetic, but it looks like the banks will be opening their coffers for the infrastructure sector. Local governments are able to raise approximately $229 billion which will again go into local infrastructure. A lot of money in China comes in terms of stimulus which is normally very positively correlated with global metal prices.
So supply constraints and the promise of the demand side of the Chinese stimulus leading to better demand absorption is also what is driving our metal stocks.
China wants to stimulate its economy; Europe is on the verge of recession. How will the factors play out? What is a more meaningful pattern to focus on?
Overall, what’s saving the global economy and why we’re still mildly positive is that we’re still very dovish in terms of the huge money supply that’s still floating around.
Very little quantitative tightening (QT) has taken place so far and will remain so very little over the next couple of years. Even though budget deficits have narrowed slightly this year and cash flow is drying up, it takes time.
Second, interest rate hikes will also take time. They are just starting to have an impact. Obviously, if you look at real interest rates, the world remains extremely accommodative. If you look at the amount of money that’s there and the deleveraged companies, we’re still in pretty good shape.
The energy costs are enormous, they are debilitating. In fact, today, when the UK has removed its tariff barriers and increased energy costs, we are reaching a level where households could end up paying £300 to £350 a month in energy costs, which is more than mortgage payments or rents for a lot of these households. So that will become a problem.
The energy recession in Europe is very severe and it worsens in the first quarter of next year at the height of winters. So where will China find markets? If the American consumer or the European consumer slows down, Chinese products are also limited. Much will depend on American and European consumers.
Looking at the stocks that are frequented by traders – , , even Voda Idea, which is now a weak number three – one wonders what is going on? When the tail begins to wag the dog, you have to ask yourself what is right and what is wrong.
Absolutely spot on. I’m glad you’re releasing it because you’re saving unwitting investors. It’s something like a meme stock frenzy; only in the United States are retailers attacking institutions. Here we don’t know what the interested hands are buying them, but the retail business is also sucked in.
Again, I would say for the fundamentals that these kind of so-called priced view or type of priced transformation stories should be avoided by retail investors. Maybe the smartest money will come in and extract its pound of flesh, but it’s more like the stock mania we see in US markets with bankrupt companies getting offered.
If we were to fall a little more, what would be on your shopping list?
I continue to buy regularly, but in quality stocks. We need to keep highlighting these things because we believe in stories of transformation. Think of the hapless retail investor who simply sees price movement cluelessly and is not grounded in fundamentals. So unless responsible anchors like you are warning people, this is a doomsday position.
I keep buying and my wallets are very long. My point of view will not change from week to week and I have very little interesting news to offer in this direction.
Hasn’t your point of view changed as well? On Friday, the street was nervous about high-profile outings. Do you still believe in the long-term story there?
I wouldn’t speak of stocks in particular, but generally of the automobile. I said a while ago that maybe Q3-Q4 is when autos will start to look interesting, but the market ran away before volumes even recovered. If you plot it on a 10- or 5-year basis, you realize the kind of chaos that has occurred on two-wheeler stocks.
If you’re a premium player on two-wheelers, life gets tougher with rising raw material costs. I thought we would have a late rally, but the auto really surprised us and the long positions did well. So, I’m not complaining but I was surprised. All in all, EV is turning into a big bubble globally and not just with us.
Financing can be obtained for everything relating to batteries or electric mobility. It had gotten pretty dangerous, I was talking to one of the biggest companies that every two to three weeks announces a new EV deal. My friends there are looking at something like 200 offers a month and they were explaining to me that in the two-wheeler space, it’s the top three and then it goes down. The next 48 together have next to no funding and they’re like small operations, running a couple hundred bikes but trying to get the EV label and that kind of rating. So there will be foam.
I would say stick with the legacy guys. Even though it’s a very well-funded startup, you have to see their delivery and that you wouldn’t see for quite some time. We’ve seen the explosions in the bikes, we’ve seen the non-delivery happen. It gets hard for us investors, private equity funds are easy, they keep funding them at higher and higher levels until you become a unicorn.
So in the car, that’s the big problem. We give huge bonuses to anyone carrying an EV. Beware of this, I would say that we are still in 10 years, 15 years in the revolution, it will not happen overnight, it will take time before saying goodbye to ICE engines. It will take time and very few will deliver. The legacy guys delivered, they’re cash generating machines, they’ll probably do a lot better.