One Sunday morning, too many years ago, I announced to my three sons that it was time to go to church. My eldest, absorbed in his Nintendo 64 game, confidently stated that he didn’t need to go because he “already knew all about God”. Did I somehow have offspring with immaculately-conceived knowledge of the divine? I suppose I could have simply stayed home and learned from this ten-year-old theologian, but we eventually found ourselves seated in a center pew, just in time for the second service.
The God of God and Light of Light is accountable to no one. The lords of finance (central bankers) find things otherwise these days. With inflation now the number-one issue for voters, and midterm elections coming up, Federal Reserve Chair Jay Powell is under pressure to do something. This something to do involves raising interest rates along with ‘quantitative tightening’, or QT. In layman’s terms, QT involves reducing the number of bonds on the Fed’s $9 trillion* balance sheet, which in theory will lead to less financial liquidity and higher interest rates. The goal: lower inflation by reducing consumer demand, and hopefully not break something in the process. But QT has never been attempted before, and there is no certainty of a desirable outcome.
Regarding certainty and desirable outcomes, man has been baffled ever since God created Eve. The world is complex and the future unknowable. It’s tough making one’s way, both in the real world and the financial world. To deal with all this, people develop mental shortcuts and various assumptions to better understand things. Unfortunately, these heuristics and beliefs often lead to cognitive errors, one of which is recency bias - the feeling that today and tomorrow will be like yesterday, and the day before that, and so on. Regarding inflation, the recency of ‘no problem’ extends back 40 years.
Do we really know all about (the money) god? In the Bible, 40 is a big number (40 days, 40 nights …), often used in matters dealing with judgment or testing. Well, over the past 40 years, in addition to benign inflation, investors have gotten used to having the Fed come to the rescue whenever markets were tested (1987, 2001, 2008, and 2020). Many believe that Jay Powell will once again provide ‘divine intervention’ if and when needed. But today’s conditions are different. High prices are squeezing the 40% of Americans living paycheck to paycheck, and these folks are not happy. Politicians chasing votes understand that the 40% with few financial assets outnumbers the 10% with most of them. This simple math makes it hard for The Money God to once again favor Mortimer Moneybags over Joe Sixpack.
*A note on trillions is here.
Any opinions are those of James Aldendifer and not necessarily those of RJFS or Raymond James. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. Investing involves risk and you may incur a profit or loss regardless of the strategy selected.
