Many Technology investors got religion on August 26th as it relates to interest rate increases (more to come) and a Fed pivot (not any time soon). The message of “higher for longer” was reiterated yesterday by Fed Chair Powell. The Fed tends to undershoot when it comes to inflation and its Fed Funds target. We expect a Fed Funds rate north of 5% next year as we wrote yesterday. There is little to be bullish about:
- Rates are going higher: The 2-Year Treasury stands at 4.11% and all rates are likely to move much higher as the Fed continues to tighten, as economic risks increase and as geopolitical risks show no signs of abating. In a word, rates/yields are going “UP”.
- Muted GDP, persistent Inflation, no near-term Pivot: Both the Fed and the Bank of England are tightening into an economic downturn. This is the recipe for a full-blown global recession.
- Don’t expect the U.S. nor the U.K. to pivot as inflation persists in both countries – especially the U.K. – which is feeling the energy crunch more so than the U.S. (The U.K. gulped hard on the “Green Energy” Kool Aid over the past 20 years. As a result it produces little of its own energy). If the U.S. or the U.K. were to lower rates now and start up the printing presses, inflation would accelerate. Thus, a pivot is not a near-term option. We published the BoE’s Inflation and GDP outlook earlier this week (HERE). The BoE essentially made the case for Stagflation (get our book on the subject HERE).
- No time to be long “Risk”, focus on “Quality”: It’s simple math: Higher Rates + Weak Economy = Lower Equity Values. If you have no choice due to fund mandates, invest in “quality” names. “Quality” equals industry-leading companies that generate predictable cash flows led by proven management teams. Quality companies will navigate an economic storm better than second-tier and third-tier companies.