Gavekal: «If the Fed Tightens Too Much, They Will End up With an Equity Market Crash»
From NZZ's The Market.ch, January 5:
Louis-Vincent Gave, co-founder and CEO of Gavekal Research, talks about
the most important investment topics in the new year and reveals where
he would invest now.
«Inflation will return with a vengeance», said Louis-Vincent Gave in this interview with The Market one year ago. At the time, hardly any forecaster had expected annual inflation in the U.S. to rise all the way to 6.8%.
For
Gave, co-founder and CEO of Gavekal Research, the key question this
year is how the Federal Reserve will respond to high inflation. A hard
tightening – which he does not expect – would hit highly valued growth
stocks and encourage a rotation towards Europe and Japan.
In
an in-depth conversation with The Market NZZ, which has been edited for
clarity, Gave also talks about policy shifts in China, the outlook for
gold and commodities – and he says what an investment portfolio has in
common with a rugby team.
«The
Fed will say they are worried about inflation, but deep down, all the
policy settings were put in place to get this result»: Louis-Vincent
Gave.
When you look at the macro picture today, what are the most important developments?
The
starting point is that inflation has come back. Financial markets
haven’t really responded massively to the high inflation readings
though, at least until now. We haven’t seen a big impact on currencies,
bond yields stayed the same, gold did nothing, and US growth stocks
continued to outperform. Most of these asset prices have not moved the
way one thought they would in the face of higher inflation.
Why is that?
I
see two possible explanations. The first is that markets are still
under the premise that this inflation is transitory. But I have a hard
time believing that, as even central banks have given up on it.
And the second explanation?
At
the end of the day, markets don’t really care about economic numbers.
They care about policy. Last year, we had accelerating inflation, but
the policy framework stayed the same, with very easy fiscal and monetary
policy in the US, the Eurozone and Japan. So markets just continued to
rip higher. This is thus the big question for 2022: Do policy makers
start to shift their policies on the back of higher inflation? Will we
see tighter fiscal and monetary policy? When it comes to fiscal policy,
there is the realization within parts of the Democratic party that
continuing to spend crazy money amid rising inflation could cost them
votes. Maybe they shouldn’t commit to trillions of infrastructure
spending at a time when businesses already can’t find workers.
So the rising dollar and flattening yield curves are signalling market expectations that policy will be tightened significantly?
I think this is what’s happened, yes.
Will policymakers really tighten significantly?
My
inclination is that they won’t. They just can’t. If the Fed tightens
too much, they will end up with an equity market and a real estate
crash. I think the Fed will try to continue on the side of always being
late. And this is based on my core belief that today’s inflation rate is
not a bug. It’s a feature. It’s what they want. It’s how you deal with
an excessive amount of debt. So they will say they are worried about
inflation, but deep down, all the policy settings were put in place to
get this result. It’s just like the 1950s and 1960s: You know, we came
out of World War II with very high levels of debt to GDP, and we took
care of it through 15 years of negative real rates. It’s the same plan
this time around.
We have seen a hawkish turn by the Fed lately, at least verbally. So you think they will be all bark and no bite?
I
think so. For now, what the Fed is presenting us is that a faster
tapering is hawkish. Well no, a faster tapering just means they are
being less dovish. They are still injecting liquidity, just at lower
amounts.....
