Every week, market veteran and president of Winston Capital Advisors, Fabian Onetti, gives his take on what will impact markets in the weeks ahead.
According to most economists we are in the last innings of economic growth in the US, or using a more appropriate soccer terms, in the last 15 minutes of the second half.
There are a few things that are common to late cycle economic behavior: commodities rise, company earnings are above the normal, equity valuations expand, markets rally, inflation shows up, the central banks act, then panic ensues.
As they say, don’t fight the Fed, it is very risky to bet against central banks when they are engaged in fighting inflation. However, this fight could be very tricky and not always go and end the same way.
I still remember very well in 1993-94 when the Fed raised rates. Most of the bond market suffered terribly, even mighty Goldman Sachs needed a capital injection, but the equity market did not move. Then, at the end of that year we had the Tequila crisis in Mexico.
Similarly, in 1997-98 raising rates derailed Thailand, Southeast Asia, Hedge Fund Long Term Capital and eventually Russia. And in 2007-08 we all know what happened when the Fed raised rates, it started with the subprime mortgages and like an ink blot it expanded to all financial markets and then the real economy.
So, what about now?
The Big Bad Wolf that is inflation did not show up. We are coming from almost zero interest rates in the US and negative in Europe and Japan. The move is going at a very glacial pace, central banks do not want to disrupt the economic recovery that we have gained after the 2008 financial crisis/recession.
But the three weeks ago we had some signs of inflation creeping up for the first time with the employment report. Last week it was the turn of CPI (Consumer Price Index) and PPI (Producers price Index). In both cases the headlines were worse than expected, but upon further analysis, the experts determined that the index had some aberrations (apparel costs and hospital services) that eventually will revert to normal. No cause for concern for now but we all know that the markets are very skittish, this was evident in the last couple of weeks.
Like in 1994, we are now hostages of the numbers. We know that we are late in the cycle, the economy is at full employment and firing on all cylinders. This phenomenon is also global. It is a matter of time for inflation to show up, granted we had been expecting it for the last two years to no avail.
But like the tale of the Wolf it may show up at any time and will catch those not paying attention. Watch the numbers and be vigilant!
Winston Capital Advisors is a firm that advises international advisors on capital markets and wealth planning. A former director at Morgan Stanley, Onetti has over 30 years of experience in international wealth management.