Fed too Focused on High Inflation & Low Unemployment

Wayne Gretzky famously said: “Focus on where the puck is going and not where it is.” Unfortunately, we believe the Fed is too focused on where the puck has been — high inflation and low unemployment. These are lagging economic indicators in my opinion and the inverted nature of the bond market is telling the Fed that they have already forced a recession scenario and are not focused enough on downside risks from the fastest tightening efforts in financial history. We believe that the Canadian central bank took the more prudent approach by pausing rate increases in March.

As we wrote last year, there will come a point when bad news becomes good news. As long as the Fed continues to raise rates like they did yesterday, we are staying balanced in our approach with asset mix decisions. There will be more bad news ahead and this is why I sound like a broken record and advise investing alongside my family in our Amplus and Lions Bay funds. I consider them to be a “Plan B,” and I like to say that the “B” stands for the Balance between upside and downside risks.

I realize that holding the position of Central Bank Chief is difficult. Their mandate is to focus on both strong employment and low inflation objectives. Arguably when inflation is high, you need to force unemployment. While most investors are focused on the loss of deposits from the banking system, we are researching the risk that loans from banks will not be paid back, and/or how many borrowers will not see their loans renewed upon maturity. Certainly, the higher cost of deposits and increased regulatory scrutiny will tighten financial conditions in the future. As you can see in the below chart, this wall of maturity grows higher in the years ahead.

In response to a journalist’s question regarding the possibility of “a soft landing,” Chair Powell said: “… There’s a pathway to that. I think the pathway still exists and, you know, we’re certainly trying to find it.” I do not believe, however, that “finding” a soft landing will be quite as easy as kids finding Easter eggs on their upcoming Easter hunts. Thus, we caution investors to fasten their seat belts. It is difficult to identify over the course of financial history a bear market that ended before the recession started.

US HIGH-YIELD BOND MATURITY WALL

Source: Pitchbook.