Investor | Family Office CIO | Portfolio Strategist | Board Advisor | VC | Finance Professor
September CPI was a disaster and now makes it impossible for the Federal Reserve to pause, let alone ease monetary policy until the Fed Funds rate reaches at least 5%, which it will by early 2023. This is not a mere opinion as opinions are like a certain body orifice: everyone has one. Fed fund futures in Chicago implied a terminal rate of 4.9% last night after CPI came out at 8.2%. Investors must dissect the CPI index if they do not wish to be skinned alive in 2023. The 0.4% rise in the CPI since August means that inflation is accelerating, not falling as the permabull mafia of Wall Street insists. Ex food/energy, core CPI was up 6.6%, enough to cause multiple heart attacks around the next two FOMC boardroom conclaves.
My call? 0.75% rate hike in both November and December. Nor will the Fed’s aggressive rate hikes end in the 1H 2023. If CPI does not plunge to 2% and I am certain it will not, the world’s overnight risk-free US dollar borrowing rate is at least 6% by June 2023. This means the rise in the US dollar index well beyond 130 is now my base case scenario. Nasdaq? Shimmy shimmy yay, shimmy ya, shimmy ya, nice bulls go Swalla-la-la-la-la!
Inflation is far more pervasive in the economy than Mr. Market or even the Fed assumed this summer. If core CPI does not decelerate, expect 0.75% rate hike in Feb 2023 for a 5.5% Fed funds rate. This is going to mean another $30 trillion margin call in global markets. The chickens have come home to roost from a decade of speculative borrowing and money printing on a scale that would have been envied by the central bankers and politicians of the Weimar Republic and Mugabe’s Rhodesia (Zim). This is bad news for Biden, Powell and private bankerji’s leverage bond portfolios and 8% hidden fee structured products.
The IMF is dead write, the darkest hour lies ahead and to butcher a Churchillian metaphor, never in the history of the world have so many been deceived so much by so few. The pain will be felt hardest in emerging markets and I can easily imagine another 20% rise in the US dollar as investors scramble to seek safe havens as the global interbank funding markets close down. I have not read about the post-Lehman contagion risk in history books. I lived it in real time in front of the green phosphorescent flicker of my Bloomberg screen from Sunrise in Singapore to sunset in San Fran. I saw the Icelandic, Irish and Spanish banking system collapse. I saw Brent crude fall by $100 a barrel in mere 5 months. I saw the chairman of Citi and UBS wipe out their capital with $60 billion losses and then be bailed out by the Bush White House. I saw the property market in Dubai enter a 10-year bear market that did not bottom until the pandemic re-opening in 2021.
History does not rhyme but it surely repeats. Credit Suisse is on the ropes. The Bank of England intervened in the UK gilt market to bailout out bankrupt British pension funds. The shadow banking system is $52 trillion dollar asset time bomb. The horror!
Also published on Medium.