Quantitative Easing

Jackson Hole is important, but that’s not all yet

We’ll get a taste of the direction central banks want to take us over the course of the week, but Jerome Powell’s speech Friday at the Jackson Hole Economics Symposium will likely be the big story.

Not only does Powell speak, but his subject will focus on the state of the global economy. This is essential because sometimes the Fed Chairman talks about darker or murkier topics. This time, he goes straight to the heart of things.

I expect to see the same thing:

  • An attempt to sound hawkish on inflation.
  • Enough worries about the economic outlook, so that the fears of an overly aggressive Fed are mitigated.

This is probably helping the markets, but with the current volatility, Friday seems like a long way off.

Even so, there are plenty of other major issues besides Powell’s speech that we need to keep an eye out for.

Quantitative tightening

This should increase in size in September. If you believe, as I do, that quantitative easing has helped inflate asset prices, this will act as a headwind.

I’m starting to see more coverage on QT again and I think as September approaches there will be more and more hesitation about what QT means for the markets, and I for one am nervous.

Constitution of the inventory

Nothing scares me more than the record inventories we have built up. I think companies overestimated consumer demand and were too preoccupied with supply chain issues and now we will have to deal with this excess inventory.

I’m expecting price cuts in everything from grills to automobiles (although I find it “ironic”, to be polite, that the entire EV industry seems to be raising prices after the Electricity Reduction Act). ‘inflation).

Perhaps companies will work their way through this smooth inventory adjustment without hitting global manufacturing hard, but I think that’s highly unlikely.

Works

Even Fed minutes noted the various discrepancies in various employment reports. Clarity on jobs will be a big driver in the coming weeks.

China

The Chinese economy is hurting and we seem to be seeing a trend in which China announces something to help futures trade briefly higher and then the realization that China’s woes are not good for the world economy returns.

Crypto

I think that:

1. The crypto is precariously positioned and could experience a large and severe pullback from here (I’m looking at Grayscale Bitcoin Trust (GBTC), which is trading at a 33% discount to NAV as both an indicator and as a way to buy, if my see back).

2. The impact on other companies (especially semiconductor companies) will be surprisingly large if the crash occurs.

So while inflation and Jackson Hole are important, they are not the only stories.

I really can’t help but think that when it comes to inflation, by the end of the year we’ll ruin the day we wanted prices to drop, because I still believe that the drop commodity prices will be linked to significant economic weakness!

I took a lot of risks last week and I’m nervous here, but I can’t be too aggressive when Powell could once again serve as the catalyst for a rally.

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