Tuesday, Sept 13, 2022
After a four day market rally, investors woke up to economic reality this Tuesday morning when the monthly consumer price index report showed a continuing high level of inflation, led by increasing rents and food costs. These increases offset the lower energy costs of the past month.
Investors had been hoping for signs that inflation was “peaking” and there would be less pressure on the Federal Reserve, (the Fed) to continue to push interest rates higher, without causing a business recession. The wishful “soft landing” outlook is certainly much further down the road.
I am of the opinion that the factors leading to the recent inflation, including the war in Ukraine, Supply side disruptions, and the years of the Federal Reserve and other Central Bankers hyping growth with money printing will not be contained easily.
Frankly, I think Fed Chairman Powell is facing a far more difficult inflationary challenge then did former Fed Chairman Paul Volker who won the inflation battle with an extended tight money policy from 1979-1981. Remember, interest rates then peaked at almost 20%.
The Fed alone cannot solve this problem. It takes the politicians to make the difficult choices of raising tax rates, closing tax loopholes, and cutting military and entitlement spending.
Although this is not an investment letter, I continue to feel that the markets will continue to struggle over the coming months. There is just too much debt out there, that cannot be serviced, particularly in China.