The markets around the world continue to show weakness as concerns grow that the Fed’s Quantitative Tightening (QT), program which is the opposite of their 12 years of Quantitative Easing (QE), will lead to a recession, and a hard stock market landing.
Tomorrow, we will get the Fed’s monthly report, combined with a probably 1/2 point, or 3/4 point increase in the Funds Rate. That is what Banks charge each other, and what the Fed charges Banks for short term loans. This rate sets the stage for most interest rates charged to borrowers, particularly what people have to pay for mortgage loans.
Raising short term rates increases the cost of buying most major products, particularly homes, and has a direct effect of slowing economic activity.
The Fed is hoping that by making products more expensive, they will reduce the number of people that can afford to buy these items, causing their prices to eventually decline. So the Fed is looking to cause a ‘mild’ business recession as a means to reduce inflationary price pressures.
But since a slowing economy is bad for business, the price of many stocks are falling. In addition, raising interest rates are bad for investors in bonds, as the market price of bonds go down, when interest rates go up.
Now many advisors will tell you that is not a problem for investors because if you hold a bond to maturity, you will get back the full face amount of the bond. That sounds good, but is not necessarily true for several reasons. First, you do not know the financial condition of the issuer 5, 10, or 20 years into the future. Many companies look good today, but end up in bankruptcy before many of their bonds come due.
For a current example look at the millions of bonds of Chinese Development Companies, such as Evergrande, which are close to worthless today, but looked like solid investments, a few years ago.
Secondly, because of inflation, the purchasing power of the dollar you get back in 10 years, is much less, than its purchasing power today. With inflation running at 8% per year, One Dollar will shrink to under 20 cents in 10 years.
Stocks of Growth Companies may offer some protection during the coming recession, but even the best of companies, like Apple, Microsoft, and Goldman Sacks, have started laying off staff as inflation starts to impact their bottom lines.
I think there may be a finacial storm ahead, like 2008, so be prepared and reduce your risk taking activities.
A place to hide? I like 3 month and 6 month Treasury Bills until the storm passes.