원문 보기
We think the the last uncertainty uh before we have we move into uh what we believe will be a very strong recovery uh from a rolling recession, maybe starting with a rolling recovery, but gathering momentum and uh we think by midterm elections next year uh clearly on the up and up with uh big upside surprises in real growth, productivity, and uh downside surprises on inflation.
So that would be another positive uh because of productivity. You can see the Bitcoin to gold is uh maintaining its uptrend. We'll see if it breaks out. uh I think that the risk on trade has helped it recently and uh we think that will be the case when that case will continue when it is clear that we're not going into a long-term recession.
uh that the Fed is going to ease and that a strong productivitydriven uh boom, I would say, in economic growth is is underway, paving the way for midterm elections that should favor uh the majority. Now, Kathy starts her analysis by addressing what's currently the market's biggest variable, interest rates.
This past week, Fed Chair Jerome Powell struck a surprisingly hawkish tone, even as economic data, including housing weakness and slowing consumption, suggest that easing is warrante; And one of the big variables that many people are wondering uh about now is interest rates. Uh this week, uh Chairman Powell sounded very hawkish.
Uh I think he didn't appreciate being um being featured along with President Trump, uh at a construction site. Uh so there there may have been something else going on there because the data as it is evolving here is certainly moving in a direction that would lead the Fed to uh to ease. And of course for the first time since 1993 there were two dissents uh on the the Fed board uh this time around.
And that that uh suggests that we probably are going to see interest rate uh uh cuts in the future. I think the the the odds for a rate cut in uh September are up to 88% and a 50 basis point rate cut uh maybe they're up to 25% or so. uh so uh we think that will resolve positively as well. That's the one uncertainty and and the reason uh this matters is if people think rates are going to come down then they're going to wait and see how low they go before they take major actions or make big purchases.
Uh so getting back to some kind of equilibrium is going to be important and that is we think the the last uncertainty uh before we have we move into uh what we believe will be a very strong recovery uh from a rolling recession. maybe starting with a rolling recovery, but gathering momentum and uh we think by midterm elections next year.
Uh clearly on the up and up with uh big upside surprises in real growth, productivity and uh downside surprises on inflation. So that would be another positive uh because of productivity. the dollar. I know the the headlines were blaring. Worst dollar uh start to the year or worst first half since I think 1993 if I'm not mistaken, which by the way was the last time two Fed directors had dissented from uh from the policy being made.
Um, so you can see that the all of that drama put in context uh is is was a little exaggerated shall we say and if you look at the next chart I did present it for the first time last month uh you can see here um that the uptrend has not been broken and if we're right on return on invested capital it will resume its increase uh relative to the 26 countries um in this index.
Uh inflation as measured by commodities. Um it is kind of shocking still that uh tariffs notwithstanding it's today where it was in the early 90s and in the early 80s. Here's uh the S&P price to gold. this we're paying a lot of attention to because some of the best strategists out there, our friends at GFCAL have been uh suggesting that we were going to spiral down into a a 70s uh environment with tariffs causing inflation and so forth.
Uh the market's been weighing that risk as you can see here. The most recent move however in this index has been up and we think it will resume uh as as we get through these this this uncertainty especially the uncertainty around recession and the Fed uh here relative to oil we think this is a leading indicator of what will happen and it looks nothing like it did in the 70s.
Uh here I always like to uh keep this chart in mind. I started my career um really near the peak of this of uh interest rates and have been riding down the curve throughout my career which was delightful. Um but you can see there there's a downtrend which is good up to a point. What did near zero% treasury yields mean?
It it it meant in the case of COVID, are we going into a deflationary bust? And we got out of that and maybe we have just bounced back to something more normal now that the the Fed is letting markets work. Um, we do think that the Fed is actually airing a bit in the other direction as I mentioned before and that will change and with it we do think interest rates along the entire yield curve will come down.
And here's Bitcoin to gold. Uh, you can see that Bitcoin to gold is uh maintaining its uptrend. We'll see if it breaks out. uh I think that the risk on trade has helped it recently and uh we think that will be the case when that case will continue when it is clear that we're not going into a long-term recession.
uh that the Fed is going to ease and that a strong productivitydriven um boom I would say in economic growth is is underway paving the way for midterm elections that should favor uh the majority now. So with that, I know a lot of puts and takes, a lot of charts. Uh but it it was a busy day for sure in the markets.
A lot of fear surfacing uh once again. Uh and yet the way we're interpreting this is this is uh another indication that the market is climbing a wall of worry. And we need these shutters every once in a while uh to keep speculation in check. Uh and we think that's just another one of those checks. Two sectors Kathy believes will drive the recovery are housing and capital expenditures.
Housing has been in a deep freeze due to high mortgage rates, but prices are beginning to drop and affordability is slowly improving. If the Fed cuts rates this fall, Cathy believes housing will accelerate sharply in the next 6 months. Capital spending is also set to rebound. With new tax clarity and interest rate relief, businesses may begin deploying capital into high multiplier projects, areas that create secondary and tertiary spending across the economy.
As I mentioned, uh, Chairman Pow Powell sounded quite hawkish, uh, even though reporters were saying, "Well, wait a minute. Housing seems to be relapsing." And he deflected that. And well, wait a minute. The the metrics you look at in terms of core growth and core inflation, they're all moving in uh in the right direction when it comes to inflation.
uh and actually in the wrong direction when it comes to GDP growth. Uh I think um I'm not going to get the metric exactly right, but what Chairman Powell uh focuses on is real private uh domestic final sales and that uh is running in the 1% range. And we saw that with the consumption figures very slow.
The consumer is becoming quite cautious and beginning to uh lift the savings rate. Uh we think that could cross 5% this year. Uh but you see money growth did start turning around. It was negative for quite a while. We're now up to roughly 5%. But when you get cautious consumers, that means the velocity of money, the rate at which it turns over slows down.
So the stimulative effect just isn't going to be there the way that this chart might suggest. Um, we also know that the CPI, which is depicted in the green here, uh, faces some tough comps comparisons. So I think uh we have two more tough comparisons at the zero and 0.1% rate for the next couple of months.
So uh the inflation rate could stabilize here and maybe that's what uh Powell was responding to just knowing that the optics aren't going to look great on inflation meaning continued progress. Um but if but if we're right uh that will be it then we're off to another leg down in inflation towards the 2% and actually below the 2% range if we are right now.
Of course we have been expecting much lower inflation for quite some time. Tariffs are complicating the situation perhaps a bit right now. Uh but there are metrics out there. Oh, well before before I go on to inflation, let me just uh depict um Fed policy here. This is the 2-year Treasury yield uh less the 3-month Treasury yield.
And when it is below zero, which it is here and has been for quite some time, monetary policy is restrictive. You can see every time this has happened before, um we end up in a recession. And uh you know we're very lucky we haven't ended up in a fullblown recession. It's been more of the rolling uh variety.
But we do think because of how long this has taken place uh you know the Fed jacked rates up in 22. So it's been 3 years that a lot of rubber bands are stretching particularly in the housing and capital spending uh markets. the housing needs lower rates and or lower prices and we are starting to see lower prices um moving af uh affordability up slightly.
I think lower interest rates um will uh really get it going in in the next six months and capital spending. Now we have certainty with this tax package and I think those two sectors are very high multiplier sectors. In other words, a dollar spent on housing causes all other uh kinds of spending to take place.
When you move into a new home, you're buying lots of stuff. Uh and uh the same with capital spending. Uh lots of uh follow on from $1 of uh $1 spent uh on capital expenditures. So, um we do think the Fed's too tight. This chart is reinforcing it. We're starting to see a little progress. We've seen uh we've seen a relapse and we do think it might mean that in September we'll see a 50 basis point cut uh and perhaps for the rest of the year 75 basis points uh when all is said and done especially now that uh employment is showing such weakness.
Kathy reflects on a persistent inversion in the 2-year versus 3month Treasury spread, a classic indicator of restrictive monetary policy. Historically, when this spread goes negative, a recession almost always follows. And yet, the US has avoided a deep recession, instead experiencing a rolling downturn sector by sector.
But with this inversion persisting since 2022, Kathy warns that rubber bands are stretching, especially in sectors like housing and manufacturing. Prolonged tight policy risks breaking those bands.
Comments 0