Everything is Down Except Inflation

The subject is the title of Scott Grannis’ Califia Beach Pundit blogsite. Scott, former chief economist for Western Asset Management, blogs on the state of the economy and markets from his secure position as a former economist, i.e. retired. We think his take on the current economic situation is accurate.

The following is an excerpt from his latest blog.

Chairman Powell has it all wrong: the way to kill inflation is not to kneecap the economy, it's to reduce the supply of money and increase the demand for it by raising interest rates. The Fed has already succeeded in doing that! There's no reason at all that we need a recession to get inflation down. In fact, a growing economy can actually help to bring inflation down by increasing the supply of goods and services. I just don't see the Fed continuing on the inflation warpath for very much longer.
 

This bad Fed dream will be over soon. This is not the time to be cashing out of risk assets.

Think of it this way. People want to buy cars, but there are almost none to be had. Most buyers would like manufacturers to build more cars so that buyers can find what they want at a reasonable price. Chairman Powell thinks the remedy would be to raise car loan rates and slow down the economy so that people won’t even try to buy a car. Both solutions will drive down the price of cars, but one seems vastly preferable to the other.

The Fed’s current actions are meant to counteract the monetary policy of the pandemic. This seems to us to be a case of two wrongs still not making a right.

What you have just witnessed in the last nine months has been a very bad period for a diversified stock and bond portfolio. The bond portion is shaping up for a quick recovery. Stay tuned.