Legacy One Wealth Management

Markets, Inflation and the Fed…

If you’ve read any of my previous posts regarding the Fed, you already know that I am no fan of the way this group operates. The Fed has unlimited power to effect our economy while having no accountability.

The market turmoil that we are seeing is a direct result of poor Fed policy. You need to know that the whole time that inflation has been a threat, the Fed has continued to buy assets every month at an astonishing rate.

Let’s start with inflation. Inflation was never “transitory” as both the Fed and the current Administration has been flooding the market with money. Economics 101…Over supply creates lower value. In this case the oversupply of money has decreased what a dollar will buy in the stores. The Fed has been buying assets (bonds). First, In my opinion they have no constitutional authority to do so. Second, where did they get the money with which to buy these assets? Answer… the created it out of thin air. That “printed money” goes into the marketplace, making your spendable dollar less valuable.
The money that the government continues send out as stimulus is creating higher than normal demand for the goods and services we all want and/or need to buy. Increased demand drives up prices. The shut downs created a supply chain catastrophe unlike anything we’ve ever seen. Increased money supply, increased demand, and decreased supply equals inflation… every time.
Now, as the Fed finally acknowledges that inflation isn’t (and never was) a short term problem, they are trying to play catch up. So, rather than making small incremental changes to the interest rates that banks pay, they are taking big swings at the problem and HOPING for a soft landing. History tells us that a rough landing is far more likely than a soft one.
As of April 27, 2022 the Fed holds $8.96 TRILLION in assets. You need to know that the whole time that inflation has been a threat, the Fed has continued to buy assets every month. Now, to combat inflation, they plan to start unwinding, or selling off those assets. This will take money out of the marketplace and in theory, help combat the inflation they have created. This, to me, is evidence of a gross dereliction of their duty to secure and promote sound money. Their job is not to manipulate the economy or the market but that is exactly what they have been doing for years.

Now we are in a predicament that leaves us with the highest rate of inflation we’ve seen in decades, and the real threat of a looming recession.

“Current market sentiment does not place a lot of confidence in the Fed getting inflation under control without a recession. This skepticism may be warranted as most Fed tightening cycles have led to recession, though near the end of – or after - the tightening cycle,” said David Donabedian, chief investment officer of CIBC Private Wealth US. “We suspect this skepticism is likely to remain until there is clearer evidence that inflation has crested and has begun to fall appreciably. That could take several months.”

The stock market is in turmoil, having the worst month in April since March 2020. That turmoil continues into May due to a total lack of confidence in Jay Powell and the Fed’s ability to get inflation under control without creating a recession. We are taking a defensive posture for our clients at this point so that when the dust clears, we will be ready to take advantage of the selloff and buy solid companies at a discount.

This commentary is based on the opinion of Rob Brafford, founder of Legacy One Wealth Management and is not to be taken as investment advice. Please speak with your advisor or contact us before making any investment decisions.

The supply chain nightmare doesn't seem to have an end in sight as China shuts down a portion of the world's 3rd busiest port after ONE positive test. Currently there is a backlog of 40 cargo ships anchored off the coast waiting to enter the port, while off the coast of California, over 30 ships are waiting to dock at the Port of LA.

"Freight costs from China to the US rose to a record $20,000 per 40-foot box last month, a 500% increase on the cost in the same month last year." - Fortune.com
The Baltic Dry Index (daily rates that commodities producers pay shipping companies to move various commodities by sea) is up over 10% in less than a month. - Bloomberg